Kester Eddy in Budapest -
Banks have been in (sometimes heated) talks with the Hungarian government since February over how to tackle the crushing foreign currency debts of Magyar households. And with a moratorium on home repossessions and evictions due to end on July 1, and the total amount of "delinquent" loans increasing, a solution is now regarded by all sides as a matter of urgency.
Tamas Bernath, for one, well remembers the Hungarian public's initial love affair with Swiss franc loans some eight years ago. "Local-currency housing loans in 2004 carried an interest rate of about 11%. Given that banks were simultaneously offering Swiss franc loans at 4-5%, it is little wonder that people were keen on forex-based credit, primarily in Swiss francs," he says.
By early 2008, that early enthusiasm had turned into a stampede; more than 90% of all new retail and housing loans, the vast majority using homes as collateral, were in Swiss francs, euros and even Japanese yen.
Bernath, a banking expert who now heads the Financial Sector Advisory of PriceWaterhouseCoopers in Budapest, says he and other professionals saw the risks from the very beginning, but the warnings - including notices from the central bank and Pszaf, the financial regulator - were largely ignored in the headlong rush for seemingly cheap credit. "Almost all the Hungarians taking forex-based loans were being paid in forint. Of course, there was a huge risk that if exchange rates moved against them, they would have trouble with repayments," he says.
And when it came, the trouble was very serious. As the world economic crisis took hold in the second half of 2008, Hungary's manufacturing industries, the bastions of its economy, began to downsize rapidly. And as unemployment and short-time working rose, the forint slumped. Hungarians who could buy the Swiss franc for as little as HUF150 early in the year, faced a rate of HUF200 on their repayments only nine months later.
As the stock of bad loans, and subsequent repossessions of homes by banks increased, so too did the public outcry, fuelled by TV reports of anguished families being turfed out onto the street. In an attempt to ease the pain, and facing a spring election, the Socialist-technocratic government led by Gordon Bajnai imposed a moratorium on evictions in early 2010. "The moratorium certainly calmed public fears, though in fact the number of evictions was limited; it is not an efficient way for the banks to recover money in a weak housing market, itself made weaker by the moratorium," says Bernath.
The incoming government of Prime Minister Viktor Orban in 2010, which had pledged to avoid evictions as part of its election campaign, extended the moratorium - first to April this year, and later to July 1 - while it wrestled with the problem of how to live up to, and pay for, its campaign promises.
But while the extension eased the situation for those who could benefit from the limited economic recovery over the last year, the situation for others has deteriorated further. "Many of the debtors are family people living in small towns, where both housing market liquidity and employment chances are worse than average. They can't just move off for better jobs," says Bernath.
The moratorium has introduced another problem - moral hazard. Janos Muller, spokesman for the Hungarian Banking Association (HBA), says that ithout the threat of eviction, those struggling with debts have less incentive to pay off mortgages. "We certainly have evidence of this; the number of non-performing debts has grown," he says.
Bernath concurs: "The number of non-performing household loans now totals some 110,000, or close to 11% of total, up from 3% in late 2008."
While a cause for concern, the National Bank of Hungary insists in its latest stability report that the non-performing household loans aren't a threat to the banking sector as a whole, which is well capitalised. Nonetheless, foreign-currency loans still make up almost two-thirds of Hungary's total household debt of just under HUF10 trillion (€37bn), according to central bank data. And with the Swiss franc now trading around HUF213, the situation for debtors isn't easing.
The banks, meanwhile, are also feeling squeezed. Bank sector results have worsened significantly, partly due to the crisis tax. Returns on equity in the sector have come down from an average of 11% in 2007 to just 2-4% last year, when "four of the largest seven banks made losses," says PwC's Bernath.
While both the government and the banking association expressed optimism in early May that an agreement on a package of measures was close, this appeared to be scuppered two weeks later when the media reported that the government had insisted on some last-minute, radical changes to conditions, which the banks had rejected as highly unfavourable. (These included setting the exchange rate at HUF160 to the Swiss franc, instead of HUF190, for a period of four years.)
On May 18, HBA's Muller insisted to bne that talks were continuing. "The media reports are not correct. There has been no final draft from the government. Our goal is to come to a solution. This is very important, because the housing market is dead. Banks are unable to lend [without guaranteed collateral]."
But asked if government demands were making agreement less likely, he replied: "Do not let us be pessimistic."
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