Hungary sets terms for conversion of Swiss franc retail loans

By bne IntelliNews August 19, 2015

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Hungary’s government is pushing forward with its plan to convert foreign currency retail loans into forints, Economy Minister Mihaly Varga announced on August 19.

The move is a follow-up to the conversion of billions of euros worth of mortgage loans in late 2014 that fortuitously spared banks and borrowers the shock of the Swiss franc’s sharp appreciation in January.

Varga announced that the conversion of about HUF305bn ($987mn) worth of car and consumer loans, most of which are denominated in the Swiss currency, will take place at the market exchange rate at 12pm on August 19. 

That means around 229,000 loan contracts can be converted at CHF/HUF287.2 and EUR/HUF309.2, report analysts at Portfolio.huwith the forint around a four-month high versus the Swiss currency. The mortgage conversion rate of CHF/HUF256 was set in late 2014. In January, the spike in the Swiss franc saw it jump to CHF/HUF320 or more. "What we really have here is a conversion at a discount rate of over 10%," the analysts sum up.

Overall, borrowers would get rebates worth some HUF31bn to compensate them for some of the exchange rate weakening, Varga estimates. The relief will be covered equally by the government and banks, which will be allowed to reduce their 2016 and 2017 tax bills by a corresponding amount.

The minister added that the conversion plan, which was approved after talks with the Hungarian Banking Association and the Magyar Nemzeti Bank (MNB), will be voluntary. Borrowers will have 30 days to decide whether to use the opportunity or not.

Interest rates on the converted loans will be fixed. The respective legislation will be submitted to parliament in September.

“Hungarian families will be relieved of the risks that foreign currency loans and exchange rate volatility have posed over the past years,” Varga said, adding that the measure would cut the share of foreign currency retail loans in the overall portfolio to just 3% from 54% before the conversions started.

“Pursuant to the agreement between the MNB and the Hungarian Banking Association on 19 August 2015, the MNB will provide the Swiss franc liquidity required for the forint conversion,” the central bank said in a statement on its website. The MNB will hold its first tender on August 24, at which counterparty banks will be able to acquire the necessary Swiss franc liquidity at the latest official MNB exchange rate effective at the time of the tender.

The MNB played a major role in the conversion into forint of household foreign currency mortgage loans. As a result, it noted, the vast majority of household foreign currency loans have been successfully phased out.

Having been hit hard by numerous taxes, conversion programmes and other policy moves since the Fidesz government came to power in 2010, the banks were forced late last year to convert all forex mortgage loans into forints. That saved borrowers and banks from the fallout seen elsewhere in the region after the Swiss franc's surge. The likes of Poland and Croatia are still trying to come up with a solution to the troubles the Swiss currency has bequeathed.

The conversion also removed longstanding currency restraints on monetary policy, but the cost to Hungary's banks was high. The fact that the new conversion programme will be voluntary, and the costs shared with the government and compensated via tax breaks, illustrates a far softer stance from Budapest. 

That comes as the government finds itself with skin in the game. The state bought out the foreign owners of two banks over the past couple of years, bringing the share of local ownership in the sector to over 50%. At the same time, under an agreement struck in February with the EBRD and Austria’s Erste Bank, the government pledged to consult with lenders before introducing measures that could hit their performance in return for a boost in lending by the banks to the economy.

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