Bloomberg News

Eastern Europe’s Borrowers See Relief as Swiss Peg Franc to Euro

September 06, 2011

Sept. 6 (Bloomberg) -- Switzerland’s ceiling on the franc’s exchange rate will bring relief to eastern European borrowers struggling to repay Swiss franc loans and cash-strapped governments running out of options to help them.

The Swiss National Bank’s imposition of a minimum rate of 1.20 francs per euro sent the Hungarian forint soaring as much as 10 percent against the Alpine currency, the most on record, to as much as 225.784. The zloty rose as much as 9 percent to 3.453.

Hungary and Poland, the two countries most-indebted in Swiss francs, suffered after monthly installments soared when investors sought safety in francs and shunned euros and dollars as the European and U.S. debt woes roiled markets. Two-thirds of Hungarian mortgage loans and 54 percent of Polish loans are based in francs. That’s equivalent to 16 percent of gross domestic product for Hungary and 10 percent of GDP for Poland, according to UBS Wealth Management.

“I see it as a breakthrough,” Gabor Orban, who helps manage $2.5 billion in central and eastern European debt at Aegon Fund Management in Budapest, said of impact of the SNB move on Hungary. “It’s very good for OTP, for consumption, very good for value-added-tax receipts,” Orban said. The decision also benefits bonds because of its impact on Hungary’s budget.

OTP Bank Nyrt., Hungary’s largest lender which has seen its non-performing loans rise, gained 6 percent to 4,190 forint at 11:18 a.m. in Budapest. Getin Holding SA, the Polish financial- services group controlled by billionaire Leszek Czarnecki, soared 4.8 percent to 8.49 zloty and BRE Bank SA, a unit of Commerzbank AG, increased 3.1 percent to 241.2 zloty. Bank Pekao SA, majority-owned by UniCredit SpA, climbed 1.4 percent to 135.4 zloty.

Currency Boost

The Swiss decision will “soon” help the zloty strengthen to 4.15 per euro while the Hungarian forint may advance to 271 versus the European common currency “in the near term,” Mateusz Szczurek, chief economist for central and eastern Europe at ING Groep in Warsaw, wrote in an e-mail today. The forint traded at 275.8 and the zloty at 4.21 per euro at 11:45 a.m.

The franc has surged to records against the euro and the dollar, hurting Swiss exports and eroding economic growth. While the SNB last month boosted liquidity to the money market and lowered borrowing costs to zero, investor concern that governments may struggle to contain Europe’s worsening debt crisis has continued to push the currency higher.

Government Help

Hungarian Prime Minister Viktor Orban, who is cloistered with his Cabinet ministers for a second day in woodland cottages an hour’s drive west of Budapest, may also get a boost from the Swiss intervention. Orban is working on additional measures to plug budget holes and also on new ways to help foreign-currency borrowers. He will hold a press conference at 3:30 p.m. today.

The government agreed with lenders in May to offer household borrowers who aren’t late with repayments the chance to fix a franc exchange rate of 180 forint until the end of 2014. The difference between the fixed-rate payments and those that would have been made at the actual exchange rates will be recorded in forint accounts to be settled at a future date.

Orban last week agreed that this was a “temporary solution” and that it “doesn’t solve the problems” of debtors. He said banks should shoulder some of the foreign currency risk. He didn’t elaborate. Central bank President Andras Simor and Economy Minister Gyorgy Matolcsy yesterday agreed to meet to discuss ways to ease the burden on borrowers.

‘Up Against the Wall’

“For foreign-currency borrowers, the move only takes away some pressure” because “a lot of the loans were taken out at much lower Swiss franc levels,” Nigel Rendell, a London-based strategist at RBC Capital Markets, said by phone. “With the government up against the wall in terms of budget numbers, they’ll try to shift some of the burden to banks.”

The Swiss decision may increase the room the Hungarian central bank has to cut rates after policy makers held the two- week deposit rate unchanged at 6 percent for a seventh month in August to protect the forint and avoid hurting borrowers.

“Now the central bank could think about a rate cut much easier than before because they have less uncertainty on the impact,” Piotr Chwiejczak, a London-based strategist for Barclays Capital.

A cut may not be imminent because of policy makers’ concerns over the impact of the continuing European debt crisis, slowing growth and financial stability, according to Peter Attard Montalto, a London-based economist at Nomura International.

“We do not see the Monetary Council cutting rates and still see rates on hold for the next year with the Monetary Council ‘paralyzed’ in a ‘do-no-harm’ mentality,” he said.

--Editors: Alan Crosby, Andrew Langley

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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