• By
MTI/ Tibor Illyes
Janos Lazar

In the latest chapter of Hungary’s foreign-currency debt saga, a heavily indebted local government of Hodmezovasarhely and its creditor, Austrian-owned Erste Bank, locked horns when the municipality’s mayor lamented that Erste declined to share losses made on foreign currencies with the municipality.

The mayor, Janos Lazar, who is also the governing Fidesz party’s parliamentary club leader, wrote a letter to Erste Bank late December requesting they share foreign currency exchange rate losses on the town’s massive Swiss franc-based debt. Erste responded by giving an ultimatum, Mr. Lazar said Tuesday, demanding a 10-billion-forint lump-sum payment ($45 million) as a condition for a change of the bond deal with the municipality.

Erste Bank declined to comment beyond saying that the letter included confidential information.


Hungarian households took foreign currency loans, mainly denominated in the Swiss franc, over the past years and local governments also commissioned banks to issue franc-based bonds to cover their operation expenses. This mainly took place in the mid-2000s when this type of financing was the cheaper version compared to Hungarian forint-based facilities.

When the forint weakened against major currencies during the financial crisis, debt burdens have become heavier and the country’s high foreign currency indebtedness became a systemic vulnerability. Although the government and banks joined forces to find a way out for households, there’s still no solution in the pipeline for local government debt.

Total Hungarian local government debt was around 1.8 trillion forints ($10 billion) at the end of 2011, according to a study by advisory firm PWC.

The Hodmezovasarhely local government signed bonds worth 69.4 million Swiss francs in 2006, with the franc-forint rate at 173.4 forints compared to the current 243.53 rate and 251 in December 2011. The bond contract included a five-year exemption period, which ended last year. The town has since been paying back its debt.

Mr. Lazar said the 10 billion forints required by Erste equals a ten-year repayment in one sum, adding there’s “no local government in Hungary with enough cash to make a one-off payment of this size.”

He said the bank is abusing its power. He earlier said he’d use his position in parliament and influence on the government to solve the issue.

The Hungarian Banking Association said earlier that contracts between local governments and banks are in all cases subject to an agreement of the parties. This contrasts the situation household mortgage holders, for which a single solution was found.

The Hodmezovasarhely local council insisted that banks must cooperate with their clients amid the international financial crisis, and banks must share the burdens of their clients so that both sides suffer losses that are of an acceptable level for them. The council will hold a meeting Thursday when it’s set to publish a communique.