Hungary banker warns sector risks implosion if forint doesn't stabilise

By bne IntelliNews March 10, 2009

Kester Eddy in Budapest -

On the same day the head of Lithuania's central bank had to reassure Lithuanians about the stability of the local currency after people lined up in banks to exchange litai for euros after rumours of a devaluation, a leading Hungarian banker was urging the authorities to act to stabilise the forint or risk an implosion of the banking sector as the public panics and changes household savings into foreign currency to maintain their value.

"If the population begin to convert their savings because they fear a fall to HUF350 or HUF400 [to the euro], then nothing can save the banking system," László Urbán, CFO of the country's largest lender OTP Bank, told a meeting on March 9 of the American Chamber of Commerce in Hungary.

With the Hungarian currency falling to a record low of HUF318 to the euro on the previous Friday as rumours sent by email and text urged people to withdraw savings from banks, Urbán said this "signals that we are probably not far from that level now... or, rather than a particular level, psychologically we are in the danger zone."

Urban, who was within a whisker of being appointed finance minister in the Fidesz-led government in 1998, warned that there was "no room for the traditional Hungarian approach" of regaining competitiveness by further devaluation of the forint. "I agree that from the HUF230-250 level [to the euro] the forint had to be corrected; but from the HUF270-280 level I believe we are in very dangerous territory."

A further devaluation of the currency risked throttling domestic consumption, creating crippling state debt repayments and squeezing out liquidity from the banking sector - which are all serious problems in themselves, he stressed. "Devaluation reduces the liquidity available to [finance] the economy, because what we do is convert forint to foreign currency to cover our positions. Every 10% [drop] reduces by HUF300bn liquidity from the banks which we need to put up as margin calls behind our swap transactions," he said.

Under these conditions, Hungarian policymakers have no room "except to use everything that they have to reverse [fears] and stabilise the currency. I think the policymakers, the monetary policymakers as well, need to realise that their communications since December have given the signal that all they think about is their inflationary rate targeting," he said.

The currency weakening on March 6 prompted the central bank to announce that it would "use the full range of monetary policy tools available" to it in order to stabilise the markets, which helped the forint rally on March 9 to 308.65 versus the euro.

Speaking at the same forum, Lajos Bokros, finance minister in the Socialist-led government of 1995, said the crisis afforded politicians an opportunity to take hard decisions on structural changes, and move away from the common line that such tasks should be postponed until better times. However, while the situation was grave, "the credibility gap can be closed... I don't think that in a European Union country, with a decent IMF programme, fiscal collapse is a realistic probability or possibility," he said.

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Hungary banker warns sector risks implosion if forint doesn't stabilise

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