Hungary's banks relieved by market rate conversions

By bne IntelliNews November 10, 2014

bne -

 
Hungary will force the conversion of forex bank loans at current exchange rates, the economy ministry announced on November 9. The move appears to let lenders off the hook, and suggests that the government is feeling the pressure at home and abroad.
 
In an emailed statement, the economy ministry said Hungary's banks will be required to convert foreign currency loans at the Magyar Nemzeti Bank's November 7 exchange rate, or at the average rate since June 16 - the date that a constitutional court ruling finally opened the way for the government to force the conversion. That will put the conversion rate at around HUF309 to the euro and HUF256.5 for the Swiss franc.
 
The central bank will apply whichever rate is better for borrowers, who from February will have 30 days to convert their loans, the MNB said in its own statement. Economy Minister Mihaly Varga told MTI that borrowers have the opportunity to retain forex loans, but in that case they will continue to face the risk of exchange rate fluctuations.
 
Meanwhile, the MNB announced it will provide €9bn to banks via tenders at spot prices to help them hedge "open" positions. The press release from the central bank also suggests the conversion process will last around three years until the liabilities of banks mature. That, again, will be welcomed by the banks, who had feared  an instant conversion.
 
The government is determined to provide relief for hundreds of thousands of Hungarians who took out mortgage loans denominated in euros and Swiss francs during the boom years. The global financial crisis has suppressed the value of the forint, hiking repayments. The high level of forex debt in the country therefore exposes Budapest's erratic policymaking to market pressure.
 
The use of market rates comes as a huge relief for the banks, which have already restricted their lending in the country because of  high taxes and previous schemes to provide relief for forex loan holders.
 
"The news is definitely positive," cheers Jozsef Miro of Erste bank, "as the determined FX rates are close to the actual spot FX rates … At the moment, it looks like banks do not need to
account for additional significant losses over the HUF 900bn-1,000bn caused by the rule on the FX spread and IR changes."
 
Step back
 
The use of market rates has been hinted at for some time because of concerns that the banks have stopped lending. The government trusts that once all forex loans have been converted, “banks will use all their energy and available resources to finance players of the Hungarian economy and to further promote the country’s economic growth”, the economy ministry statement said.
 
At the same time, despite moves since Fidesz came to power in 2010 that have been criticised for curbing the judiciary, the government has struggled to get the courts to rubber stamp its campaign against the banks. As Varga noted on November 4, the supreme court has ruled that borrowers must accept some currency risk. The Kuria also deferred many of its decisions on the issue to the European Court of Justice.
 
However, the top Hungarian court did find in the summer that the banks had dealt unfairly with forex spreads and unilateral charges. Lenders are now required to compensate borrowers for that, which will cause huge losses this year. Prime Minister Viktor Orban has previously said that he wants more local ownership of the sector, and many see the pressure on lenders as part of a strategy to get them to call it quits and sell cheaply.
 
Temporary relief?
 
The relief in banking boardrooms comes on the back of a second climbdown by Orban in as many weeks. On October 31, the populist leader climbed down on plans to introduce an internet tax. 
 
Unusually large demonstrations were sparked in late October by the government plan to tax internet traffic. With over 100,000 reported out on the streets, Orban beat a rare retreat, saying he will now conduct a public discussion of how best to levy cash from the segment, which he says is a logical extension of special taxes placed on the telecoms sector when he first took office.
 
However, events have galvanized opponents to Orban's authoritarian rule. Organisers claim 10,000 came out in Budapest on November 9 to protest against state corruption and demand the resignation of tax authority (NAV) chief Ildiko Vida.
 
Vida, who denies wrongdoing, announced recently that she is one of six Hungarian officials banned from travel to the US by Washington in connection with a corruption case.
 
The first such sanction against a Nato ally by the White House comes as the US raises pressure on Orban, with Hungary's drift towards Russia - particularly in the energy sector - an evident spark. The US and EU have also protested against pressure on Hungarian NGOs and legislation that they say weakens media freedom and minority rights.
 
Orban caused consternation in the summer when he said he wants to build an "illiberal" democracy modelled on the likes of Russia and China. In a recent speech, US President Obama included Hungary in a list of countries in which he said freedom is under threat.
 
Yet many suggest the pullback by the Hungarian PM is likely to be only temporary as he seeks to defuse the situation. He has throughout his time in office dodged between rambunctious domestic policy and statements against the EU - which have become a cornerstone of support at home - and attempts to soothe tension abroad with conciliatory nods.
 
Indeed, suspicion is already rising that Budapest may be pushing its cooperation with Moscow on regional energy further. Hungary cut the transit of EU gas supplies to Ukraine in September in return for raised deliveries from Gazprom, and changed legislation in early November in a bid to evade EU oversight of the Russian gas giant's South Stream gas pipeline project. On November 7 it was reported that Hungarian state energy holding MVM may be fronting a bid for Slovak national power utility Slovenske Elektrarne for a Russian bidder.
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