Bloomberg News

Hungary Central Bank Reserve Offer May Prompt Gain in Forint

September 21, 2011

(Updates with HSBC, Deutsche Bank comment from seventh paragraph.)

Sept. 21 (Bloomberg) -- The Hungarian central bank’s offer to use its foreign-currency reserves to help borrowers repay mortgages may prompt a gain in the forint, according to UniCredit SpA, HSBC Holdings Plc and BNP Paribas SA.

Magyar Nemzeti Bank would allow domestic lenders to tap the reserves to cope with an expected increase in demand for foreign currency after a law approved this week allowed early repayment of loans at below market rates, central bank President Andras Simor said yesterday.

“We believe the announcement might be a game changer for euro-forint,” Gyula Toth, a Vienna-based strategist at UniCredit, wrote in a research report today.

Legislation approved on Sept. 19 would allow the repayment of Swiss-franc denominated mortgages, covering a majority of the loans, at a fixed exchange rate of 180 forint per franc, and euro-denominated mortgages at 250 forint per euro, provided the loans were taken out at lower exchange rates. Losses will be assumed by banks.

The forint fell 5 percent against the euro in the 10 days from Sept. 9, when Hungary’s ruling Fidesz party announced the mortgage repayment plan and rallied 1.4 percent yesterday following Simor’s announcement, the second-best performance among all currencies tracked by Bloomberg after the Guinean franc. The forint depreciated 1 percent to 290.03 per euro as of 10:11 a.m. in Budapest and fell 0.5 percent to 237.4 per franc.

Forint Short

“We think that a lot of investors went short on the forint after the announcement of the foreign exchange programme and unwinding of these positions could help the forint outperform the region in the near-term,” strategists at BNP Paribas SA led by Bartosz Pawlowski in London wrote in a research report today.

The central bank’s move may allow the banking system to absorb potential losses from the repayment plan without increasing Hungary’s vulnerability by depleting too much of its foreign currency reserves, Murat Toprak, head of foreign exchange strategy for Europe, the Middle East and Africa at HSBC, said by phone yesterday.

Hungary’s foreign reserves stood at 34.7 billion euros ($47.5 billion) at the end of August, according to central bank data.

The central bank’s move however “won’t be enough” to prevent a decline in the forint “if risk sentiment deteriorates sharply,” Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG, said over the phone yesterday.

--With assistance from Zoltan Simon in Budapest. Editors: James Kraus, Peter Branton

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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