Hungary to convert retail Swiss franc loans

By bne IntelliNews July 28, 2015

bne IntelliNews -

 

Hungary is set to push through legislation to allow holders of foreign currency car and consumer loans to convert them into forint debt on a voluntary basis, but the conversion will be much less costly to banks than that of mortgage debt.

An official from the Ministry of Economy said late on July 27 that the government would adopt a motion to move ahead with the conversion programme at its next meeting. There are about 200,000 Hungarians holding foreign-denominated car and consumer loans worth about HUF300bn (€970mn).

Some incentives for loan holders to convert their debt, which is earmarked as a risk by the government and the central bank, will be offered. However, details have not been released.

The loan conversion will be voluntary and carried out in agreement with the country’s banks’ association, the ministry representative said. The government will also take care not to breach the agreement it signed in February with the European Bank for Reconstruction and Development (EBRD), in which Budapest committed to “refrain from implementing new laws or measures that may have a negative impact on the profitability of the banking sector".

The government and central bank have been eyeing a conversion scheme throughout the year as a follow-up to the conversion of billions of euros worth of mortgage loans in late 2014. In early June, the Magyar Nemzeti Bank said it is ready to provide €1.1bn to banks to help them carry out the new conversion.

“From a financial stability perspective, it is desirable to convert all remaining household foreign currency loans into forints," the MNB said. The number of borrowers with such loans is dangerously high and requires regulatory action, it insists.

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 saw banks and borrowers spared from the shock of the Swiss franc’s spike in January.

The conversion also removed longstanding currency restraints on monetary policy. However, the cost to Hungary's banks was high, and alongside the other tough measures from Budapest, it has helped subdue lending to the economy and investor sentiment.

Poland and Croatia are still trying to come up with a solution to the troubles the Swiss currency has bequeathed, amid fears in the banking sector that they might follow the Hungarian example.

Hungary, meanwhile, now has skin in the game, having bought out the foreign owners of several banks over the past couple of years. It is also concerned that the lack of lending will hit economic growth. With that in mind, the conditions on the conversion of retail loans look much more favourable for lenders.

"As the conversion will be voluntary and carried out in agreement with the banking association, no major loss is expected for OTP [Hungary's biggest bank]," note analysts at Erste. "The news is slightly positive, but it was expected, so no share price effect is expected."

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