Counting the costs of Hungary’s Swiss franc debt

August 11, 2011

The debt crises in the euro zone and United States are claiming some innocent bystanders. Investors fleeing for the safety of the Swiss franc have ratcheted up pressure on Hungary, where thousands of households have watched with horror as the  franc surges to successive record highs against their own forint currency. In the boom years before 2008,  mortgages and car loans in Swiss francs seemed like a good idea –after all the forint was strong and Swiss interest rates, unlike those in Hungary, were low.  But the forint then was worth 155-160 per franc. Now it is at a record low 260 — and falling — making it increasingly painful to keep up repayments. Swiss franc debt exposure amounts to almost a fifth of Hungary’s GDP. And that is before counting loans taken out by companies and municipalities.

Hungarian families could get some relief in coming months via a government plan that caps the exchange rate for mortgage repayments at 180 forints until the end of 2014.  But the difference will have to be paid — with interest — from 2015.  Meanwhile, the issue threatens to bring down Hungary’s banks which must pick up the cost in the meantime and will almost certaintly see a rise in bad loans —  no wonder shares in Hungary’s biggest bank OTP are down 25 percent this month.  “(The franc rise) suggests a massive jump on banks’ refinancing requirements going forward, ” says Citi analyst  Luis Costa.

These overburdened banks will end up cutting lending to businesses, meaning a further hit to Hungary’s already anaemic economic growth. ING analysts earlier this month advised clients to steer clear of Hungarian shares, “given the burden from (forint/franc) depreciation not only on loan-takers but also the implications this has for the domestic growth story.”

Thanks to some deficit cutting measures and low inflation, Hungarian bonds have been among fund managers’  favourites this year. Unlike countries such as Brazil or Poland, Hungary was not raising interest rates. Citi’s Costa says longer bonds are still being too slow to price the risks — he predicts  the 70 basis point spread between two-year and 10-year Hungarian swap rates will widen much further. And late on Wednesday, JP Morgan said it was going underweight Hungarian bonds. Analysts there suggest that at a time when other emerging markets are preparing to slash interest rates, the falling forint might force Hungary’s central bank to do the opposite.

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