New twist in Hungary’s Swiss debt saga. Banks beware.

September 9, 2011

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.”

2 comments

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The financial wizard game explained.
You have a small fire in your house,but before
you can turn your waterhose on , the water is shut
off for a new rate in price for water.Not able to
meet the demand right away ,your house burns down.
The hedge fund wizards become the designated
beneficiaries of your fire insurance and you are on the
way to become a member of the dumpster patrol.

Posted by Hansdampf | Report as abusive

Two inaccuracies here (at least). The existing plan is not a “deviation” from the previous one, debtors will be able to choose from either of the two plans. Secondly, the government line is not that the “financial consequences should be borne by the banks”, but that the risks should be shared (50%-50%) between the debtors and the banks, hence the proposed exchange rate, which is half-way between the current exchange rate and the average exchange rate at which the debtors received the loans. I’m just an individual and know these facts better than you. You’re a global news service, (presumably not willfully misleading your readers). Start acting like one.

Posted by anyjaszemit | Report as abusive