The surging Swiss franc has dealt a double blow to homeowners in Austria, home of the trend for borrowing in the Swiss currency that has devastated mortgage holders across eastern Europe.
In the early 1990s, people living in the west of the country who crossed into Switzerland to work were lured by the ultra low interest rates offered in the safe-haven currency.
The idea then spread, crossing a fundamental red line that was barely perceptible at the time: the new borrowers were not earning Swiss francs but euros.
Foreign-currency loans now account for nearly a fifth of household debt in Austria, even though regulators effectively banned them in 2008 for fear of a looming crisis. Around 150,000 families still owe around 29 billion euros of Swiss franc debt, with 4 percent of loans due within a year.
Banks' loan books could take a hit if defaults rise. Austrians are relatively wealthy and have benefited from rises in property prices, but poorly performing insurance policies sold alongside many mortgages present an added twist.
From loans to Austrians, it was a short step for Austrian banks to start selling Swiss franc-denominated mortgages through the large networks they set up in Poland, Hungary and Romania after communism fell in 1989.
Ratings agency Fitch said four big banks - Erste (ERST.VI), Raiffeisen Bank International (RBI) (RBIV.VI), Bank Austria (CRDI.MI) and Volksbanken (OTVVp.VI) - held 30 billion euros of Swiss franc loans on their books in central and eastern Europe.
Back home, it was not relative inexperience of the financial services industry but proximity to it that caused the biggest trouble; mortgages were often linked to investment schemes designed to repay the loans at maturity.
"You often had a wealth adviser in your circle of acquaintances or family, and then you fell into their hands," said Peter Kolba of consumer advocate agency VKI.
These fee-hungry consultants often advised people to borrow twice as much as they actually needed to buy a home, and to invest the rest to finance the loan repayment.
One woman facing a 50,000 euro loss on her loan package, 20,000 of it since the Swiss central bank suddenly abandoned its cap on the franc on Jan. 15, said it was easy to be taken in.
"It looks so great when the financial advisers show you how much cheaper it is," she said, asking not to be named. "I wasn't aware (of the risk), but admit to a certain amount of naiveté."
Accompanying investment schemes were supposed to easily pay off the interest-only mortgage at maturity but were unrealistic, Kolba said.
"It would add up only if a market - counter to all expectations - only went up. The model was driven by the provisions paid for the products that were being sold," he said, noting brokers could make 10,000 euros in fees from the package of mortgage and investment funds sold to one client.
Banks have consistently offered to help customers switch out of Swiss franc loans into less-risky euro mortgages. But many clients failed to follow through in hope they could erase initial currency losses, only to get nailed again in January.
The rating agencies say the big local component of Austrian banks' loan portfolios means the risks to them are low, citing rising property prices and relatively wealthy clients.
"With two-thirds of Swiss franc mortgages held domestically, we expect asset quality deterioration to be moderate, despite the significant exposure," Fitch said.
In December, however, the Austrian central bank called the high share of foreign-currency loans "a major risk factor with respect to the financial position of Austrian households".
UNDER WATER
Erste and Bank Austria say they won't take big hits from the franc's rise. RBI has no Swiss franc retail loans in Austria and has played down the impact in eastern Europe. The Association of Volksbanks says its share of foreign-currency loans is the Austrian sector's lowest.
The typical floating-rate FX loan was worth 100,000 euros and ran from 15 to 25 years. Customers usually pay only monthly interest, with the full amount of capital due at maturity.
Christian Prantner, an expert on the mortgages at Austria's Chamber of Labour, spoke of one colleague who in 2005 took out a 20-year Swiss franc mortgage for 145,000 euros. She also bought a life insurance policy linked to two investment funds that was supposed to pay off the mortgage when it came due in 2025.
After paying in 70,000 worth of premiums, her account is worth only 50,000 after markets tanked in the financial crisis.
"She is half way through and has 10 years to go. The fund-linked insurance policy will never cover even the original loan amount, let alone what you get by converting the currency at a rate of 1.01" francs per euro, he said.
Nearly three quarters of foreign-currency mortgages due at maturity are backed by such repayment vehicles. Only a fifth get both interest and principal paid in regular monthly instalments.
One bright note is that residential property prices increased by 45 percent from early 2007 to mid-2014, or by 24 percent adjusted for inflation, central bank data show.
That is good for borrowers and banks, Prantner said. "But it can also mean customers who stick with the loan and wait until the end can have a giant gap of 30,000, 40,000, 50,000 (euros), that they then may have to sell the house" to pay the mortgage.
The latest blow is for investors who took out "stop-loss" orders to convert Swiss francs to euros should the 1.20 peg fail, Kolba said. This backfired when the franc rose so much so fast that banks could close out positions only much lower.
The woman with the franc loan said her bank executed her stop-loss order only when the euro and franc were at 1:1, not the level just under 1.20 she wanted. "That was a shock," she said, adding she had hired a lawyer to review her options.
Kolba said the best bet for many borrowers would be using a new consumer arbitration process financed by the government to reach a compromise with their lender.
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