It is a sign of the intractability of Hungary’s foreign exchange mortgage problem that it took until this May, almost 18 months after the elections, for the country’s government to deliver on its campaign promise of a rescue package for underwater homebuyers who borrowed euros or Swiss francs at a time when the Hungarian forint was stronger than it is today.
And it took just another five months to declare defeat on the first plan – a temporary exchange rate cap accompanied by an extension of mortgage maturity – after homeowners showed little interest. A new plan, unveiled in September, is more radical: the government plans to force banks to convert outstanding loans at rates last seen in 2008, when the high-yielding Hungarian forint was riding high on the carry trade.
If, as the government hopes, banks compete to offer local-currency loans with which to buy out existing foreign currency mortgages, the country’s banks could face write-offs running into the billions. The plan has drawn sharp criticism from Austria, Belgium and Italy, whose banks play a major role in the Hungarian banking sector.
Hungary is not the only country in central and eastern Europe with a high proportion of its consumer debt denominated in foreign currencies. But whereas consumers in many neighbouring countries have amassed vast amounts of euro-denominated debt, in Hungary, much of the debt is denominated in Swiss francs. According to Barclays Capital, Swiss franc loans amount to some 15% of GDP in value, while overall outstanding foreign currency debt amounts to 20% of GDP. In Poland, outstanding franc loans are worth less than 10% of GDP, while in Romania, Swiss franc loans are worth just 2.5% of GDP.
“The real mistake in Hungary was that the borrowing was in Swiss francs and not in euros,” says György Surányi, a former governer of the National Bank of Hungary and currently head of the Italian bank Intesa Sanpaolo’s operations in central and eastern Europe. “The franc/euro exchange rate has no impact on the Hungarian economy: there is no relationship between the Swiss franc exchange rate against the forint and Hungarian domestic demand.”
Recent events have proved him right: traders fleeing euro assets turned first to the Swiss franc, which soared to almost twice the level at which the original loans were made in 2006. In 2006, when most of the loans were taken out, the franc was worth between 160 and 180 forints. In the midst of the recent volatility, the franc has been worth as much as 280 forints. When Swiss authorities finally blinked in September, announcing they would sell the franc to maintain Switzerland’s export competitiveness, the forint strengthened back to 230 against the franc.
Responsibility for the current debacle, which dampens consumer demand while driving lending costs sky high, is shared between the banks, the regulators and consumers. Banks found in cheap Swiss franc mortgages an effective way of competing on price at a time when building market share was the overriding goal. But it was the regulators who allowed such a risky asset class to spread, while consumers were too dazzled by tempting interest rates to read the small print about currency volatility.
BURDENING THE BANKS
Critics warn that the latest plan places the burden almost solely on the banks.
The first plan gave borrowers until the end of the year to choose to opt into a fixed exchange rate programme: until the end of 2014, their repayments would be fixed at a level of 180 forints to the franc, with the duration of the loans extended to allow banks to make up the difference built up during the three-year exchange rate freeze. The new plan will force banks to convert loans into local currency in one lump sum, at the rate of 180 forints to the Swiss franc and 250 to the euro – well below today’s levels.
Viktor Orbán, the prime minister, has insisted that the new plan would not endanger the financial system. “Behind the foreign-owned banks stand their mother banks,” he said, adding that OTP, an independent bank that is the country’s largest lender, and FHB, a partially state-owned mortgage bank, could rely on the Hungarian state.
Investors and the central bank see it differently, however. Shares in OTP fell 15% after the first rumours of the plans emerged, necessitating its suspension from trading, while the central bank issued a statement on September 9, warning that “the only appropriate solution for reducing the burden on debtors is one that does not endanger the financial system’s stability and operation.”
Surányi regrets that his original plan – which would have seen Hungary’s central bank use its euro reserves to buy francs from the Swiss central bank in order to convert the existing debt stock into local currency – was not considered. “This would have offered reasonable burden-sharing between the banks, the fiscal authority and the borrower,” he says.
Others are sharper tongued. “Instead of taking transparent steps to remove a burden for the future, they have chosen to burden the future,” says Péter Felcsúti, who stepped down as head of the Hungarian subsidiary of the Austrian bank Raiffeisen last year to do consulting and public affairs work.
LIQUIDITY CONCERNS
Many warn that the burden placed on the banks by the new plan could see lending seize up completely and may even lead to withdrawals from the Hungarian market by major lenders; precisely the opposite prescription than is required for a resumption of economic growth at a troubling time for the global economy.
While western European parent banks deny that they are withdrawing funding from their Hungarian subsidiaries, the central bank insisted in its April financial stability report that they were already doing so. The latest plan risks exacerbating these efforts.
Felcsúti acknowledges that this liquidity withdrawal is happening. “The Hungarian subsidiaries are getting less liquidity and less capital,” he says.
“I know of banks that are planning to close further branches and lay off hundreds of people. It’s not just about a lack of demand for credit: people would be borrowing if banks were offering loans at attractive rates, but they can’t.”