Bloomberg News

Hungary to Force Banks to Foot Franc Losses, Irking Austria

September 12, 2011

(Updates with European Commission response in last paragraph.)

Sept. 12 (Bloomberg) -- Hungary is set to force lenders to swallow currency losses on Swiss franc mortgages. Financial stocks and the forint fell as the country’s banks and the Austrian government criticized the plan.

Hungary wants to allow fixing the Swiss franc at more than 20 percent below market rates for early repayment, Prime Minister Viktor Orban said today in parliament. Austria “firmly rejects” the measure, which may cause “enormous losses” to banks and risks regional financial stability, Finance Minister Maria Fekter said today. Erste Group Bank AG and Raiffeisen Bank International AG dropped, while Hungary’s risk rose.

“It tells foreign banks that they can go to hell, which in the long run is extremely negative,” Daniel Bebesy, who helps oversee $1.5 billion mostly in Hungarian government bonds at Budapest Investment Management, said in a telephone interview.

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to reduce its exposure to currency swings and help borrowers after the Alpine country’s currency rose to a record, triggering defaults and pushing up monthly payments. Today’s plan is “unacceptable” to lenders, the Hungarian Banking Association said.

A request by Orban to legislators to not force lenders to issue forint loans may limit the market impact of the plan as most Hungarians don’t have savings to repay loans in a lump sum, according to Bebesy at Budapest Investment Management.

Stocks, Forint, CDS

OTP Bank Nyrt. and Foldhitel es Jelzalogbank Nyrt. were suspended for today’s session before the start of trading. Hungary’s benchmark BUX stock index dropped 2.9 percent to 16,540.74, its lowest since July 29, 2009.

Raiffeisen fell as much as 10.2 percent in Vienna, trading down 4.3 percent at 23.455 euros by 5:39 p.m., the lowest since June 2009. Erste was down 5.4 percent at the lowest since July 2009. Their Hungarian units are among the country’s six largest lenders.

The forint fell as much as 1.3 against the euro and traded down 0.6 percent at 281.9 by 5:37 p.m. in Budapest. The Hungarian currency declined 0.9 percent against the Swiss franc to 233.9. Hungary’s credit-default swap rose 13 basis points to 457, the highest since April 2009.

The government will allow borrowers to modify loan contracts and is preparing to respond to a backlash from abroad that may include lawsuits, Orban said. The Cabinet backs OTP, Hungary’s largest lender, and mortgage lender FHB, while foreign banks stand behind their Hungarian units, he said.

Economic Consequences

The plan to fix exchange rates at 180 forint per franc and 250 forint per euro, proposed by Orban’s ruling party last week, poses a “significant threat” to the financial industry and the wider economy, the Banking Association said in a statement today. The lenders are “ready” to turn to Hungary’s Constitutional Court and the European Union to fight the measure, it said.

OTP competes mostly with units of international banks, including Raiffeisen, Erste, UniCredit SpA and Bayerische Landesbank.

“Forcing market participants to take enormous losses on their books through legally decreed prices and exchange rates is not acceptable practice in a market economy, and is in contravention of all expectations an investor may have in a functioning market economy and democracy,” Fekter said in a letter to Hungarian Economy Minister Gyorgy Matolcsy, according to an e-mailed statement.

‘Crossed a Line’

Erste had 3 billion euros ($4.1 billion) in Swiss franc loans outstanding in Hungary at the end of June, while Raiffeisen had 1.6 billion euros. Other international banks with units in Hungary include KBC Groep NV, Bayerische Landesbank and Intesa Sanpaolo SpA.

“The market didn’t explode, that’s the good news,“ Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a telephone interview. “The economic impact is smaller than if they had forced lenders to give out forint loans. Still, the impact on their credibility is the same: they’ve crossed a line.”

Premier Orban roiled markets last year by effectively nationalizing private pension funds, levying extraordinary taxes on banks, energy, retail and telecommunication companies to plug budget holes, curbing the power of the Constitutional Court, eliminating an independent Fiscal Council and creating a media watchdog staffed by his allies.

Franc-Fixing

The franc-fixing plan for mortgage repayments is the latest attempt to help borrowers, many of whom took out loans at about 150 forint per franc and are struggling with their payments as investors sought to place funds in Swiss francs to avoid riskier euros and dollars. Hungary is preparing for possible speculative attacks on the forint from abroad, Orban said 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 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.

That proposal only offered a “temporary solution” and the people’s demand for a “permanent solution beyond a temporary one is justified,” Orban said Sept. 2.

Chantal Hughes, a spokeswoman for the European Commission in Brussels, declined to immediately comment on the Hungarian measures.

--With assistance from Andras Gergely and Edith Balazs in Budapest, Boris Groendahl in Vienna and Jim Brunsden in Brussels. Editors: Balazs Penz, Andrew Langley

To contact the reporters responsible for this story: Zoltan Simon at zsimon@bloomberg.net

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


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