Bloomberg News

Hungary Franc Fix May Backfire on Economy, Borrowers, CIB Says

September 12, 2011

Sept. 12 (Bloomberg) -- Hungary’s growth and currency may suffer and more borrowers could be hurt than helped by adopting a proposal to allow repayment of foreign-currency mortgages below market rates at the banks’ cost, CIB Bank Zrt. said.

Prime Minister Viktor Orban will detail a Cabinet decision on his ruling party’s proposal to parliament at 1 p.m. today in Budapest. OTP Bank Nyrt., Hungary’s largest lender, and Foldhitel es Jelzalogbank Nyrt. were suspended from trading on the city’s stock exchange.

Fidesz lawmakers proposed on Sept. 9 to make lenders bear the cost of early repayment of foreign-currency loans at fixed rates as much as 20 percent below market rates. Two-thirds of Hungarian mortgages are denominated in Swiss francs and defaults have been rising as a strengthening franc sent monthly installments soaring.

“Should the plan be adopted in its current form, it would have a negative effect on financial stability, the banking system and investors’ risk assessment,” Gyorgy Barta and Sandor Jobbagy of CIB, a unit of Intesa Sanpaolo SpA, said in an e-mail today. “It would only provide a solution to a few borrowers and could even cause a deterioration in the situation of non- performing borrowers.”

OTP plunged 11 percent and FHB dropped 5.5 percent on Sept. 9 after the ruling party proposed fixing exchange rates at 180 forint per Swiss franc and 250 forint per euro for early loan repayments.

Forint, CDS

The forint today weakened for a third day, depreciating 0.7 percent to 283.4 per euro and declining 1 percent against the Swiss franc to 234.2 by 10:12 a.m. in Budapest. Credit-default swaps used to protect Hungarian government debt against non- payment for five years surged to 461 basis points from 416 basis points on Sept. 8, the highest since April 2009, according to data from provider CMA.

The franc fix plan may help as many as 300,000 of the 1.5 million borrowers with foreign-currency loans, who either have enough savings or can take out a forint loan to repay their debt, Fidesz parliamentary leader Janos Lazar said on Sept. 9.

The rest may be worse off because of the weakening of the forint and bank losses, which may further restrain lending and undermine already slowing economic growth, the CIB economists said. The government cut its growth forecast to 2 percent this year and 2012 from 3.1 percent and 3 percent, respectively.

‘Damaging Effect’

“If all borrowers took advantage of the opportunity, a theoretical possibility, the banking system would face a loss of 1.2 trillion forint ($5.8 billion), half of its equity capital,” CIB said. “Although foreign owners could step in, lending would surely remain frozen and affect growth negatively. Additionally, the move could have a damaging effect on the forint, causing problems for those who do not wish to repay in advance.”

The ruling party’s proposal may have “severe” economic consequences and endangers financial system stability, the Hungarian Banking Association said in an e-mail on Sept. 9.

Hungary must help foreign-currency mortgage holders in a way that doesn’t undermine the banking system, Lajos Kosa, vice- president of the ruling Fidesz party told HirTv yesterday.

The Hungarian 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 for their installments until the end of 2014. The difference between the fixed-rate payments and those that would have resulted under actual exchange rates will be recorded in separate forint accounts to be settled from 2015.

‘Reduce External Debt’

That plan only offered a “temporary solution” and the demand for a “permanent solution beyond a temporary one is justified,” Orban said on Sept. 2.

“The switch from foreign to domestic currency loans would markedly reduce the country’s external debt and improve the financial situation of households,” strategists at BNP Paribas SA led by Bartosz Pawlowski in London wrote in a research report today. “These developments are negative for the banking system, but the forint is likely to recover slightly.”

OTP competes mostly with units of international banks, including Raiffeisen Bank International AG, UniCredit SpA and Bayerische Landesbank, and in the mortgage market with FHB.

--Editors: Balazs Penz, James M. Gomez

To contact the reporters responsible for this story: Zoltan Simon at zsimon@bloomberg.net Andras Gergely in Budapest at agergely@bloomberg.net

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


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