from MacroScope:
New twist in Hungary’s Swiss debt saga. Banks beware.
A fresh twist in Hungary's Swiss franc debt saga. The ruling party, Fidesz, is proposing to offer mortgage holders the opportunity to repay their franc-denominated loans in one fell swoop at an exchange rate to be fixed well below the market rate. This is a deviation from the existing plan, agreed in June, which allows households to repay mortgage installments at a fixed rate of 180 forints per Swiss franc (well below the current 230 rate). Households would repay the difference, with interest, after 2015.
If this step is implemented and many loan holders take up the offer, it would be terrible news for Hungary's banks. The biggest local lender OTP could face a loss of $2 billion forints, analysts at Budapest-based brokerage Equilor calculate. Not surprisingly, OTP shares plunged 10 percent on Friday after the news, forcing regulators to suspend trade in the stock. Shares in another bank FHB are down 8 percent.
But Fidesz' message is unequivocal. "The financial consequences should be borne by the banks," Janos Lazar, the Fidesz official behind the plan says. The government is to debate the proposal on Sunday.
OTP and its peers could be forgiven for feeling aggrieved. They are already saddled with the highest financial sector taxes in Europe and will almost certainly see a rise in bad loans as the economy stagnates and more Hungarians lose their jobs. They are also picking up the cost of the three-year exchange rate cap for mortgage holders.
The proposed plan may also have implications for the forint -- ING Bank chief EMEA economist Simon Quijano-Evans notes that if 200,000 to 300,00 people to take up the new offer -- as the government apparently expects -- the forint will weaken as these people buy Swiss francs to repay their debts. Based on average loan size, over 2 billion euros worth of forints could be sold, he estimates.
Banks' main hope now must be the central bank. The latter has responded to today's proposal with a warning that solutions to the debt crisis must not threaten the financial system's stability.
But the Fidesz government's capacity to spring nasty surprises on the banking sector will make investors even more defensive about Hungary. Quijano-Evans for one advises staying away from Hungarian equities and unhedged forint positions, noting that "the risk of the government going ahead with some sort of plan to the detriment of banks has increased strongly."
Act now or forever hold your (b)-piece, Obama
It appears the penny has finally dropped in Washington.
Bank bailout watchdog Elizabeth Warren, chair of the Congressional Oversight Panel, has unveiled a report that outlines the perilous state of the U.S. commercial mortgage sector, which left unaided could spark “economic damage that could touch the lives of nearly every American”.
The Havard Law School Professor and her panel colleagues are talking the kind of apocalyptic language that may just shock the White House and its star policy advisers into facing problems banks have now rather simply obsess about those they may or may not encounter in the future.
The global banking system may well need some kind of Volcker-esque guidelines to curb the next generation of excessive risk-takers but critics say Obama is putting the cart before the horse in his efforts to haul the economy back on track.
Certainly, the U.S. government has toiled long and hard to stabilise the U.S. housing market, like propping up Fannie and Freddie and their dysfunctional offspring, but the subprime mess has distracted attentions from the toxic commercial market, where the clean-up task is no less important.
Warren reckons there is about $1.4 trillion worth of outstanding commercial real estate loans in the U.S that will need to be refinanced before 2014, and about half of them are already “underwater,” an industry term that refers to loans larger than the property’s current value.
But some believe bank brains are wasting too much time figuring out how the so-called “Volcker rule” might affect their operations and future profitability, instead of getting their arms around the real estate loans that could snap their institutions in two long before the anti-risk measures even take hold.
has it ever occured to people that the Obama administration is not there to fix anything ? just asking
Remember the subprime crisis?
Remember the U.S. subprime crisis? Lombard Odier thinks the crisis is not over, and worse, a second wave is just ahead of us.
Paul Marson, chief investment officer at the investment firm, thiknks that Alt-A and Option ARM (Adjustable Rates Mortages) mortgages are due for resets in 2010/11.
Alt-As sit somewhere between prime and subprime mortgages. Option ARMs are mortgages which required little or no documentation, where borrowers had the option of making minimum monthly payments lower than the accruded monthly interest on the loan. Given the shocking borrower quality, the hope was that house prices would continue to rise and homeowners could simply “flip” the property when the mortgage came to reset.
Lombard says there are almost $200 billion of Option ARMs to reset in th years aset and the delinguency rates are already running at close to 40 percent and the reset time-bomb is equal in magnitude to that of subprime in 2007/2008.
“Whoever said the credit crisis was over (probably Tim Geithner!) is severely misguided,” Marson said in a note to clients. “The consequence of ‘subprime the sequel’ is that further substantial losses will be taken by the government purse and the financial sector is a long way from being able to function normally.”
The best of both worlds?
Combined Shariah and ethical/SRI products could be the way forwards for Islamic finance investing, according to Dr Humayon Dar, CEO at BMB Islamic, the Shariah consultancy at BMG Group.
Speaking at the Reuters Islamic Finance Summit today, Dar highlighted the development of an upcoming F&C fund that will meet both ethical and Shariah investing criteria, and can be sold to both Muslims and non-Muslims. “I see this as the way forward in markets such as Malaysia, where a significant proportion of the population is non-Muslim,” he said, adding that once such products have established a track record, it should appeal to a broader audience, and encourage other launches.
Marrying the Western and Islamic traditions of investing could help Shariah surmount a number of hurdles that have so far limited its appeal. A recent Oliver Wyman survey found that only half of the 1.4 billion Muslims worldwide would opt for Islamic finance if given a competitive alternative to conventional products. Dar said he had conducted his own survey which found that no more than 25 percent of UK Muslims was interested in Islamic banking and finance. “The vast majority prefer competitive quotes from non-Shariah providers,” he said – this is particularly the case in the mortgage sector.
In other countries he said the problem is twofold. Where Arabic is not the dominant language, the severity of the prohibition on earning interest on financial products is not recognised by the majority of Muslims. In other countries it is a question of poverty: “This technicality is not relevant to their thinking,” he said.
Despite this, he was optimistic about the prospects for growth in the next decade: “By 2020, Islamic financial products will account for 40 percent of the total in the top six Islamic finance markets,” he said. These markets include Saudi Arabia, Malaysia, Bahrain and Kuwait.
In the short term he also predicted a bumper year for sukuk – the Islamic equivalent of a bond. The last six months of 2009 should see an increase in sukuk activity, and in 2010 he predicted increases in activity of up to 200 percent.
“This is an asset class that could grow very quickly as the fall in oil prices has consequences for governmental budgets – it’s likely that we will see some sovereign issuance,” he said.
Islamic finance has already gotten attention from non-Muslims in terms of its relative immunity to toxic debt–most notably, from the Vatican: http://www.findingdulcinea.com/news/busi ness/2009/march/Western-Interest-in-Isla mic-Finance-Increasing.html
