Hungary's central bank indicates more pain for banks over forex loans

By bne IntelliNews August 27, 2013

bne -

The Hungarian government and commercial banks are due to meet Tuesday, August 27 to discuss measures to help cash-strapped borrowers with foreign-currency mortgages. A report from the central bank the previous day indicate more pain for the country's lenders, though perhaps not the most dire scenario feared.

The populist Fidesz government of Prime Minister Viktor Orban has vowed to phase out the country's $8bn in forex mortgages, which are impoverishing millions of households as the forint weakened during the economic crisis. The ratio of non-performing loans of this type reached 21% at the end of June, according to central bank data. The vulnerability of the economy from the billions in household forex debt is perhaps the last remaining brake on Budapest's unorthodox economic policymaking, as any moves like that lower the value of the forint, like interest rate cuts, would immediately hurt households.

An earlier repayment scheme for forex mortgages introduced in 2011 saw the banks forced to shoulder huge losses. But so far less than half such loan holders joined this scheme that allows repayments at a below market exchange rate of 180 forints to the Swiss franc, compared with market levels of about 241, as people hope this next scheme will be even more generous.

The Hungarian central bankers, vice president Adam Balog and managing director Marton Nagy, said in the report published August 26 that Hungary's government should consider cutting the outstanding principal on forex mortgages. The current scheme splits the interest payments of the mostly Swiss-franc loans on the share above 180 forint per franc between the government and the banks. By forgiving part of the principal payments on the loans and extending the grace period from the current five years, the scheme might be more attractive to borrowers, the central bankers propose.

"This wouldn't be a one-time, immediate foreign-currency conversion of the outstanding debt, but the gradual yet complete conversion into forint and elimination of the exchange-rate risk," Balog said in the report.

The bank said in the study that the measure would cost HUF30bn-40bn (€100m-134m) annually. Analysts at Budapest brokerage Equilor estimate the plan could mean HUF30bn50bn additional burden on the banks if the forex rate on the mortgages does not change until maturity. "OTP's share could be around HUF10bn annually or HUF35 per share per year. The news is negative on OTP, but yet it is only a central bank study - the details of the agreement on FX loan relief program will be the main driver of the share price," Equilor said.

The worry has been that Fidesz would push for a populist solution, given that it is clearly now in campaign mode ahead of a general election in May next year. However, it also needs the battered banks to start lending again to support recovery from recession, meaning a compromise was on the cards. Finance Minister Mihaly Varga had already indicated that the most drastic option to get rid of forex mortgages, which would cost around HUF1.1 trillion (€3.7bn), is unlikely.

Reuters said the bank association was not immediately available to speak about it, nor was not clear whether the central bank's idea was an official proposal for the talks set to be held between the government and banks.

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