When the Swiss National Bank de-pegged from the euro last month, the fallout was massive.
One dramatic example of its impact was that felt by Miami-based hedge fund manager Everest Capital. The firm's largest single fund lost nearly all its capital, $830 million in assets, thanks to heavy bets that the Swiss franc would decline.
Alpari UK, a foreign exchange broker, became insolvent. New York's FXCM Inc. (NYSE: FXCM), an online foreign exchange trading firm, got a $300 million lifeline from Leucadia National Corp. (NYSE: LUK).
But just like the subprime mortgage debacle in the United States, small retail investors are caught in the crosshairs too.
Don't let yourself be one.
How Europe Could Stem the Incoming Tide of Bad Loans
Few may be aware that in the 2000s, homeowners in Eastern Europe - mainly Poland, Romania, and Hungary - took out Swiss franc-denominated mortgages.
Despite warnings from policymakers and economists, these mortgages were irresistible thanks to interest rates far below those of their national currencies.
But what borrowers failed to understand (or chose to overlook) was the exchange rate risk embedded in those loans. Thanks to the recent surge in the franc against the euro and numerous other currencies, the burden of those mortgage payments has been compounded by the exchange-rate variable.
Now those mortgage holders are clamoring for help, and getting it in the most likely of places. Even better, there are companies that can profit handsomely from the situation.
Back in November, Hungary made a deal with retail banks to convert forex home mortgages into the local currency at official exchange rates. It's a compromise deal, where homeowners gain a lot, and banks lose a bit. Sort of.
1.3 million households saw a 25% to 30% drop in their monthly payments. For their efforts, retail banks will get a 9 billion euro bailout from the central bank's foreign currency reserves.
Needless to say, this move was hugely popular with concerned borrowers, and earned Prime Minister Orban much appreciation from distressed borrowers.
Homeowners in Poland took notice, with hundreds turning out to protest in Warsaw, Poznan, and other cities, insisting the government provide help repaying their Swiss franc-denominated mortgages.
Presumably to buy votes to shore up her own election campaign, Polish prime minister Ewa Kopacz recently said, "Poland may help financially troubled holders of Swiss franc-denominated mortgages at the expense of the banks... If I have to choose between the interests of the banks and of the people who took out these loans, I will stand behind the people, but at the cost of the banks, not of the (state) budget."
As we well know, banks will not stand for that, so public money may ultimately be the remedy here too. It's another case of socializing the debt through use of the state funds. Everyone ends up paying for the affected.
It is estimated that 550,000 such Swiss-denominated loans are held in Poland. That totals $36 billion, equal to a not insignificant 8% of the nation's GDP.
Meanwhile the EU's second-poorest member, Romania, is looking to mimic Hungarian and Polish methods in dealing with 75,000 of its own adversely affected borrowers. While in Croatia a shocking 17% of Swiss franc-denominated loans are currently non-performing.
This country could easily be next to dump consumer losses onto banks, thanks to their own large portfolios of Swiss franc-denominated loans. And we all know who will end up footing that bill too.
Geopolitical Risk Adds Yet More Concern
OK, by now you're probably thinking: So what? Who cares if a bunch of Eastern European banks fail or (much more likely) get bailed out? I say not so fast.
You see, Raiffeisen Bank International, based in Austria, has branches across Central and Eastern Europe.
Already reeling thanks to forex damage from exposure in Ukraine and Russia, Raiffeisen Bank International AG (VIE: RBI) has been one of the biggest providers of Swiss franc-denominated mortgages in Eastern Europe.
Rubbing more salt in the proverbial wound of investors in these mortgages, since January 1, new EU rules force junior bondholders to take losses before state aid can be provided.
With 4.3 billion euros of Swiss franc loans on its books, Raiffeisen, despite a recent rally due to a Ukranian ceasefire, is in a bad place.
Its stock has been in freefall since the perfect storm of Ukraine, Russia, and Eastern Europe has hit. So it came as little surprise when management announced a major restructuring recently, saying it would be selling operations in Poland and Slovenia, and scaling back in Russia, Ukraine, and Hungary.
Compounding matters, Raiffeisen has essentially taken a distributed risk and focused it in Austria. Banks within the Raiffeisen cooperative hold 282 billion euros of assets, reaching a mind-numbing 87% of Austrian GDP.
Can you see where this may be going?
While all this risk may look relatively benign from Wall Street, it's very possible this crisis will come full circle. To wit, it's not difficult to imagine the rapid escalation for the European equivalent of what was initially a U.S. financial crisis that soon spread like wildfire, quickly going global. Right now the European economy is fragile enough.
The last thing we need is a crisis in the world's No. 2 currency.
Here's the Opportunity...
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Clearly staying away from European bank stocks laden with both rapidly devaluing and defaulting assets is a risk-management given. Less obvious is the profit opportunity: buying in on the opposite side of the scenario to take advantage of the strength of the Swiss-franc as a result of de-pegging from the euro. Here's how.
In well-covered news, Apple Inc. (Nasdaq: AAPL) issued $6.5 billion bonds in early February.
Of that $6.5 billion, $1.35 billion was issued in Swiss-franc denominated bonds. It was the first time Apple issued in Swiss-francs, and not surprisingly. The company smartly took advantage of the country's low borrowing costs, driven down by the de-peg. Swiss government bonds currently are well below 0% all the way out to the 10-year mark on the yield curve.
Comparatively, Apple's November 2024 issuance at a nominal .281% represents a fixed-income value, especially in light of a strong American dollar.
Apple also issued 15-year bonds with a .74% coupon. Again, nominal at face but at a considerable spread over much of what Europe has to offer (and with a corporate backing that ironically could prove substantially more solid than most European governments).
With the proceeds reported to fund Apple dividend payments and buybacks, investors who also hold Apple stock are in turn bolstering their equity portfolio. And profiting on the back of what might be the next big mortgage crisis.