EU banks irked by Hungary move

Hungary’s government could launch a new round of measures that would hurt foreign banks operating in the country. The government of Viktor Orban may go ahead with a plan to convert citizens’ foreign currency mortgages into local currency debt.
Prime Minister Orban says he will do everything in his power to help Hungary’s troubled foreign currency mortgage borrowers switch to forint loans. REUTERS photo

Prime Minister Orban says he will do everything in his power to help Hungary’s troubled foreign currency mortgage borrowers switch to forint loans. REUTERS photo

While eurozone leaders plan to use taxpayers’ money to shore up their banks, Hungary’s prime minister is in a “fight” against the nation’s lenders and is piling pressure on them as he tries to jump-start consumer spending.

And, for the banks at least, it may be about to get worse.

Viktor Orban has already slapped them with an extraordinary tariff to offset personal income tax cuts and launched a campaign to cut a huge level of foreign currency debt that is expected to cause big losses for financial institutions.

That plan aims to convert foreign currency mortgages – which are worth 20 percent of gross domestic product (GDP) – into forint debt to relieve pressure on households whose payments have sky-rocketed due to the Swiss franc’s surge.

Banks have been reluctant to help clients refinance their foreign currency mortgages from forint loans and are using various strategies to minimize losses stemming from the repayments. They are also seeking ways to appeal the legislation in court.

That has angered Orban’s ruling Fidesz party, which said new measures could come by December, and Orban flagged new “uncharted” ways to break out of the foreign currency debt trap last week.

“Banks will have to warm up to this thought, and if the law on repayments that has been passed is not enough, then further measures will come by December,” Fidesz parliamentary group leader Janos Lazar told TV2 earlier this week. “We are unshakeable in this, that we will go down this road, and the parliamentary group will give all its support to the prime minister.”

Hungary’s exchange rate exposure makes the country highly vulnerable and makes it hard for the central bank to cut interest rates, as that would weaken the forint.

Despite tax cuts, people are not spending, but are repaying loans instead, and the economy is facing the risk of stagnation next year.

Cutting households’ foreign currency debt would remove a huge exchange rate risk from the economy and would thus increase the government’s room in economic policy.

The political motive

Helping mortgage holders may also pay off politically as parliament prepares to pass a 2012 austerity budget. A fresh poll has shown Fidesz’ public support has fallen to 20 percent from about 40 percent when it swept elections last year.

The government has not given any hint on what further measures it might use to boost borrower participation in the relief scheme, but Orban said foreign exchange loan holders will get “every help” possible to switch into forints.

Lazar said new measures should cut the number of foreign currency debt holders “radically” by the first half of 2012.

“The task facing the Hungarian economy will be entirely different if 10 percent (of FX loan holders) take advantage of it (repayment) than if 60 percent do,” Orban has said.

Analysts said possible further measures brewing up may include making forint refinancing loans mandatory or capping interest rates, and one analyst even mentioned a forced conversion of foreign currency loans into forint-based loans.

Orban said local governments indebted in Swiss francs should also get help to get out of the debt trap.

“The prime minister also mentioned the loans of the local government sector. What kind of a loss sharing could there be? Obviously, they will probably push the losses on the financial sector just like with the repayment scheme,” said Matyas Kovacs, an analyst at Raiffeisen.

Austria’s Erste Bank, emerging Europe’s second-biggest lender, has announced it will lose up to 800 million euros and not pay a dividend, partially due to a hit it has taken on Hungarian foreign currency loans. Raiffeisen has said its Hungarian unit could face 120 million euros in losses.

Erste said it will inject about 600 million euros into its Hungarian unit. Raiffeisen also plans to inject capital into its Hungarian unit, its chief financial officer said.

Friday, October 21, 2011