MacroScope

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.

Amid the storm of Europe’s sovereign debt crisis, investors have found a safe harbor in the Swiss franc. Attracted by its low levels of inflation and stable debt-to-GDP ratio, traders have pushed Switzerland’s currency up 15 percent against the euro in 2010 and 6 percent so far this year. This has been a boon to the Swiss government’s ability to finance its operations — Switzerland’s 10-year benchmark bond is currently yielding just 1.53% — as well as Swiss tourists, who are enjoying huge discounts on trips abroad thanks to their favorable exchange rate.

Swiss exporters, though, are not so thrilled with the franc’s rally. Nearly half of the Swiss corporate executives that the central bank surveyed earlier this year admitted they “experienced negative effects” due to the currency’s strength. But it’s the chairman of the Swiss National Bank, a former hedge-fund manager named Philipp Hildebrand, who may be come out as the biggest loser from these events. In an effort to contain the franc’s upward climb early last year, Hildebrand spent 147 billion francs — nearly 25% of the country’s GDP — buying mostly euros, U.S. dollars, and British pounds sterling. The central bank reported a book loss of nearly $21 billion last year as the franc continued its ascent.

Now Hildebrand, like his American counterpart Ben Bernanke, is facing heat at home for his unorthodox monetary maneuvers. Reuters Zurich bureau chief Emma Thomasson wrote an illuminating profile of Hildebrand last month that nicely captured his opponents’ gripes.