Banks at risk of another hit as Hungary PM starts election campaign

By bne IntelliNews July 17, 2013

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The Hungarian government has launched campaigning for the 2014 elections with anti-EU rhetoric and a move to eject the International Monetary Fund (IMF). Another huge hit for the country's banks could be next on the list.

Following up a demand from the previous day that the IMF, which led a €20bn bailout of Hungary's economy in 2008, pack its bags, Prime Minister Viktor Orban on July 16 pledged Budapest will fight for space to decide its own economic policy and reject dictates by "European Union bureaucrats" for non-euro members.

The apparent start of campaigning by the ruling Fidesz party is likely to put investors on alert. None more so than the battered banks; a deputy PM duly obliged, separately suggesting the government is mulling the introduction of legislation to modify foreign-currency loan terms.

Speaking to Hungarian ambassadors in Budapest, the PM admitted that the success of the Eurozone is in Hungary's interests due the country's huge dependence on export demand out of the single currency bloc. However, he also warned that Hungary must take into account that the Eurozone is going to be rapidly and decisively integrating institutions and economic policy.

Like the move to see off the IMF that was announced on July 15, Orban's latest comments are clearly meant for domestic consumption ahead of the 2014 parliamentary elections. At the same time, the PM boasted of his government's success in fiscal management, and predicted a spectacular growth figure will be recorded in the fourth quarter, reports

"Orban is keeping to the prudence in public finance mantra, given that elections are due by April 2014. He seems to view prudence in public finance (low deficit, declining public debt) as a selling point with the electorate," suggests Tim Ash at Standard Bank, in an emailed note.

Bad loans

Meanwhile, Deputy Prime Minister Tibor Navracsics said the government is mulling implementing wholesale changes to the conditions of retail forex loans via legislation. That move comes after Hungary's highest court ruled in favour of the country's biggest bank - OTP - in what was seen by the market as a test case of the banks' ability to maintain the conditions on the billions of euros worth of loans handed out during the boom.

Navracsics claimed on private channel HirTV that pressure is now mounting on the government to find a solution. "We are now looking at possibilities within the constitutional framework whether there is a way to modify the conditions of foreign currency loans with a general effect, with a law or legislation in the autumn session (of parliament)," he said, according to Reuters.

"This could happen if some circumstance that were valid at the time the contract was signed has changed fundamentally in a way that could not be foreseen, and therefore the borrower cannot be blamed for not being able to fulfill it," the official added. He also made clear that the legislation would apply to existing loan contracts as well as future ones.

His words will send shivers down the spines of the banks, who have already been hit for huge losses on forex loans by the Fidesz government in 2011. However, the high levels of forex loans (Swiss franc in particular) are one of the last brakes on its "unorthodox" policymaking. With the likes of the EU and international institutions such as the IMF relegated to virtual bystanders by Budapest's approach, that leaves the markets as one of the few palpable international forces in Hungary.

A sharp drop in the local currency, the forint, would cast thousands of forex borrowers into even more difficulty paying their loans than currently. That would hardly play well at the polls, whereas a reduction in mortgage payments and hit to the banks would offer a huge potential boost to the government's short-term popularity, given the mood towards the financial industry right now.

A step to the right

The forthcoming election, at which Fidesz needs to defend its parliamentary majority from both the main opposition Socialist Party and the far-right Jobbik, is now presenting renewed risk to Hungary's battered investors. "The Hungarian political spectrum has moved significantly to the right in recent years," Ash notes, "and EU-bashing goes down rather well with the centre-right constituency."

The mainly foreign-owned banking, telecommunications and energy sectors have already suffered at the hands of the populist conservative administration, and so will remain wary of fresh action. The first direct victims of the 2014 campaign were the utilities, which have been forced to swallow lowered tariffs and forced sales to the government.

"It's a great wheeze," says Ash, "as it slows inflation, and allows the [central bank] to further trim policy rates. Long term it may well impact on the efficiency of utilities, as investment will likely stall, but this is a short term ploy by the government to win the 2014 elections."

Unsurprisingly, the tactic to lower energy costs for the population - cuts totaling 30% ahead of next year's vote were promised at the start of 2013, with 10% implemented thus far - seems to be working well if recent opinion poll ratings are anything to go by. With the forint and yields holding up well currently, despite the emerging market pullback, the government may reckon on pushing more populist moves past the market while it thinks it can get away with it.

However, the long-term consequences are also palpable. The banks were furious in late 2011 when Orban forced them into a scheme allowing forex borrowers to pay off loans early at exchange rates well below the market. Alongside high sector taxes, that programme saw the banks pull in their heads and practically cease lending. With three years of Fidesz under their belts, and five years of crisis, the strain is starting to tell. Foreign banks have started to leave, and Raiffeisen Bank International announced "massive" cutbacks in Hungary and Slovenia on July 16.

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