Global Investing

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.

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.

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.

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.