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DISCUSSION - HUNGARY - FX problems and government intervention

Released on 2012-10-12 10:00 GMT

Email-ID 2276068
Date 2011-11-08 21:53:38
*This is more a recollection of what has happened in the past few months
in political/economic context - can elaborate more on analysis in a follow
up to this discussion, but either way comments are very much welcome

The ECB came out today and said that Hungary's early repayment scheme for
its foreign exchange-denominated mortgages will have adverse affects on
both the country's banking system and wider economic stability. This comes
as the Hungarian government has hinted that it will not add any further
measures to the controversial move which has been met with much criticism,
not least of of which from Austrian banks. How this plays out will have
both economic and political implications for Hungary and the wider region.

Root of Hungary's economic problems
* The major problem boils down to this - sharp rise in the Swiss franc
as a result of the European financial crisis (The franc traded for 160
forints before the crisis, it trades at 248 forints as of November 8)
* About 60 percent of outstanding mortgages in Hungary are denominated
in Swiss francs, and Hungarian households' Swiss franc debt amounts to
almost 20 percent of GDP
* Therefore, this has put huge pressure on the country's mortgage
market/banks and wider economy and so the government sought ways to
reduce foreign currency debt exposure of the country
Government moves and intervention
* Sep 19 - The Hungarian govt passed legislation that allows full early
repayment of foreign-currency denominated mortgages at a fixed
exchange rate of 180 forint to the france. The legislative fix
benefits only those bank customers who have taken up their currency
loan at a rate of less than 180 forint to the Swiss franc and less
than 250 forint to the euro. In effect, the government forced the
banks (most Austrian) to swallow the difference.
* Sep 29 - Legistlation goes into effect and through 30 December 2011,
those affected may announce the repayment, which must then be made
within 60 days. If the borrower meets all requirements, banks must
accept the repayment and bear the resulting burden.
* Oct 24 - Orban says that Hungary's government aims to gradually
eliminate all foreign currency mortgages in Hungary, adding that
foreign banks were expected to bring back more funds into the country.
* Oct 26 - Hungary's National Economy Minister Gyo:rgy Matolcsy said a
downgrade by some of the three major credit rating agencies is a "real
threat", adding that asking the International Monetary Fund (IMF) for
a new credit would be a "sign of weakness"
* Oct 28 - Erste Group Bank AG expects to be unprofitable in Hungary in
the "next couple of years" as the country forces lenders into losses
on foreign-currency loans, part of Premier Viktor Orban's fight
against "debt slavery."
* Nov 3 - Hungary's government does not plan to implement new measures
to assist troubled foreign currency borrowers, according to Economy
Minister Gyo:rgy Matolcsy
* Nov 8 - Hungary's financial regulator said 29,000 mortgage holders
repaid their Swiss franc loans at a rate set by the government in a
controversial repayment programme. Almost 175 billion forints (789
million dollars) worth of mainly Swiss franc debt was paid back in
October at a rate of 180 forints to the Swiss franc. If the plan
pushed by Prime Minister Viktor Orban succeeds, as many as 270,000
additional borrowers could join the programme.
* Nov 8 - The European Central Bank (ECB) said the Hungarian
government's early repayment scheme for borrowers with foreign
currency-denominated mortgages can weaken the banking system's
stability and have adverse effects on the economy.
Economic Implications
* Foreign lenders (especially Austrian banks) lost 200 million dollars
as a result of the government's decision.
* This has weakened banks in the country and hurt foreign investment
* There is also the risk that Hungary will lose its investment-grade
credit rating, with the downgrade putting more pressure on foreign
bank lending and Hungary could be forced to turn back to the IMF for
* This also comes as there are fears that major European banks will seek
recapitalization and remove their assets from Central Europe -
something which has already showing ominous signs when Commerzbank
(Germany's leading bank in C/E Europe) announced on Nov 4 that it was
freezing new loans outside Germany and Poland
Political implications
* Hungary is relatively stable politically compared to some of its other
Central European counterparts, with the parliamentary elections last
year giving an unprecedented 2/3 majority for the right-wing Fidesz
party of Viktor Orban along with coalition partner KDNP
* However, since elections last year, Orban's Fidesz-Christian Democrat
alliance has been widely criticized for controversial policies such as
centralized media regulation, a re-write of the Constitution and
judicial reform
* On Oct 23, at least 10,000 Hungarians gathered Sunday in the capital
to demonstrate against the government of conservative Prime Minister
Viktor Orban. The initial impetus for the movement was a protest
against newly enacted media laws that many critics of the government
see as an attempt to stifle the opposition press, but the support base
appears to have broadened, with many representatives of trade unions,
students and other civic groups in attendance.
* So political stability in the country can't be taken for granted