Forint Drops to Seven-Week Low, Hungary Yields Rise on Swiss Franc Concern

The Hungarian forint weakened for a third day and bond yields climbed to the highest since July as concern intensified that the Swiss franc’s record high may push more homeowners into default as the value of their mortgages rises.

The forint depreciated 0.3 percent to 289.03 per euro as of 10:29 a.m. in Budapest, the weakest intraday level since July 20. The yield on the country’s bonds maturing in 2013 added 6 basis points to 7.13 percent. The Hungarian currency sank to a record low against the franc for the second day.

Hungarians owe about 7.3 trillion forint ($32 billion) in foreign-currency loans, equivalent to 69 percent of overall household credit. Of that, 82 percent is in Swiss francs, according to central bank data. Homeowners seeking lower interest rates had borrowed 2.38 trillion forint in franc- denominated mortgages at the end of July from 133.8 billion forint at the start of 2005.

“The markets remain skeptical regarding Hungary,” wrote Commerzbank AG currency strategists led by Ulrich Leuchtmann in Frankfurt. The franc’s advance is “making the situation for the Hungarian borrowers who had decided in favor of the then-lower interest rates in Switzerland increasingly difficult. Their debt levels continue to rise.”

In 2008, Hungary became the first European Union nation to obtain an International Monetary Fund bailout to avert a default as demand for its bonds dried up at the height of the global credit crisis. Prime Minister Viktor Orban’s government said on Aug. 25 it won’t seek to extend the 20 billion-euro ($25.5 billion) loan that expires in October.

Interest Rates

The Hungarian central bank may decide to raise interest rates by “not more than 50-100 basis points in one go” as a weaker currency increases inflation expectations, BNP Paribas SA analysts Bartosz Pawlowski and Michal Dybula wrote in a note dated Sept. 7. The central bank will release minutes from its Aug. 23 meeting at 2 p.m. in Budapest. Central bank President Andras Simor told reporters policy makers had considered raising the key rate by a quarter-point before leaving it unchanged for a fourth month.

“Unless cooperation with the IMF is renewed, the probability of monetary tightening before year-end appears high,” BNP said.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

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