Cypriot borrowers rejoice at CHF decline

Thousands of Cypriots who have borrowed in Swiss francs (CHF) for housing or other purposes in order to take advantage of the low borrowing costs got an additional bonus after the CHF broke lower against the euro and in turn the Cyprus pound.

A growing number of investors in Cyprus have borrowed in Swiss francs, which has a cost of 1.75% against the CYP borrowing costs of 4.5% and 3.25% in euros, plus the spread that any bank would charge on top of the official borrowing rate.

Recent data released by the Central Bank of Cyprus shows that 30.5% of foreign currency loans were made in Swiss francs while 48.2% were in euros and the remaining 21% in other currencies.

Those lucky enough to have borrowed in Swiss francs not only took advantage of 2.75% against borrowing in Cyprus pounds and 1.50% against borrowing in euros, but are also making additional money because of the steep and continued decline in the value of the Swiss franc against the CYP.

Since the start of the year, the CYP has gained about 1.8% against the Swiss franc to 0.3620 (2.7624) at present, from 0.3685 (2.7137) at the start of the year according to Financial Mirror data. Compared to a year ago, the difference is 3%, since in November 2005 the CHF was worth 0.3730 (2.6810) to the Cyprus pound.

 

— Euro borrowing hurts

 

During the same period, a Cypriot who borrowed in euros would have lost some of the interest rate advantage of 1.5% to 1.25% prevailing between CYP and EUR rates, according to Financial Mirror calculations.

For example, in November 2005, the euro was 0.5735 (1.7437) against the CYP, and is now up at 0.5750 (1.7391), meaning a fractional 0.25% loss in exchange value.

But if we compare to the start of the year when the euro was worth 0.5720 (1.7483) against the CYP, then the exchange difference widens to 0.50% against the Cypriot borrower who took a loan in euros and then converted the proceeds into CYP to buy a house, refinance loans or for other purposes.

Exchange rate conversion charges and other fees have not been taken into consideration for the purposes of this article. Depending on the bank providing the foreign currency loan, the conversion into CYP normally results in additional costs, charges and commission.

 

— Further declines ahead

 

The good news for those who have borrowed in Swiss francs is that the CHF is likely to stay under pressure. The break of 1.5970 on the EUR/CHF has opened upside potential for a minimum move to 1.6000 as the EUR gains support from hawkish ECB talk and the likelihood that the ECB will keep its tightening bias intact during 2007.

Another source of selling interest in Swiss francs may emerge from investors fleeing the Japanese yen after the Bank of Japan Fukui comments that signalled a hike in interest rates would come sooner than expected.

Since the yen has been heavily used as a funding currency as investors borrowed in yen and converted the proceeds into higher yielding (interest) rate currencies such as the AUD, NZD, GBP, EUR and USD, a shift out of the yen is likely to see investors using the Swiss franc as their funding currency.

Investors should however take into account the warning issued by the Central Bank of Cyprus regarding the danger of borrowing in foreign currency and their exposure to an adverse movement in exchange rates.