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A bearish direction for Polish banking?

Foreign currency loans and investments made in good times put banks at risk.

A bear lies on an artificial stone in a zoo in Warsaw March 9, 2009. (Vasily Fedosenko/Reuters)

WARSAW — Poland isn't an economic mess like Hungary, Latvia or Lithuania. It just feels that way.

The trouble? Recent steep falls in the value of the Polish currency, the zloty, are increasing fears about the soundness of country's banking system.

Much of Poland's borrowing has been conducted in foreign currencies, a strategy that made sense until recently. Interest rates were lower than for zloty-denominated loans, and with Poland on track to eventually join the euro, the risk seemed small.

But the global economic crisis has upended that model, and now the banks that were most aggressive in handing out cash could encounter real problems as the economy slows, unemployment rises and customers face growing difficulties in making ever steeper monthly payments on their loans.

About 35 percent of all Polish lending — and 70 percent of mortgages — is in foreign currencies, mostly Swiss francs. Now the zloty has dropped by about 40 percent since peaking against the franc last summer.

If a Swiss franc mortgage was taken out last summer, the size of the mortgage has increased by about 40 percent in zlotys, leaving many customers owing more than their properties are worth.

It is a dilemma countries across the eastern Europe are encountering to varying degrees. Hungarians, for example, have been even more willing to borrow in euros and francs than Poles.

A recent report by the ratings agency Moody's warned that Western banks with local affiliates could be downgraded. “Moody’s expects borrowers to increasingly experience payment problems. These trends are likely to be especially pronounced in the real estate segment,” said the report.