Hungary’s Swiss Noose Tightens as Currency Surge Swells Franc Loan Burden
Hungarian Prime Minister Viktor Orban
Attila Kisbenedek/AFP/Getty Images
Hungarian prime minister Viktor Orban.
Hungarian prime minister Viktor Orban. Photographer: Attila Kisbenedek/AFP/Getty Images
Swiss efforts to weaken the franc may not be enough to fend off threats to Hungary’s economy from homeowners and local governments that borrowed in the Alpine country’s currency.
With two-thirds of Hungarian mortgages held in francs to escape local interest rates, the Swiss currency’s 16 percent surge against the forint in the past month threatens to squeeze consumers. The cost of protecting Hungary’s sovereign debt from default rose the most in the past month among 20 emerging-market countries tracked by Bloomberg.
Hungarian Prime Minister Viktor Orban is relying on faster economic growth to help reduce the highest debt load among the European Union’s eastern members. Municipal leaders have asked for a delay in principal payments on their franc debt, increasing risks for a country that is one step away from losing its investment grade credit rating. Nomura International Plc says that a 10 percent increase in the franc trims growth by 0.9 percentage point.
“The market in general will have to take a deeper look into the Swiss-forint dynamics and how that translates into lower growth,” Luis Costa, an emerging-markets strategist at Citigroup Inc. in London, said by phone on Aug. 3. “It works like a tightening if the debt burden is too high. It bites Hungary very hard.”
Growth Effect
The franc has advanced 65 percent against the forint since the end of 2007, increasing loan repayments and reducing consumer spending capacity. The forint fell to a record 254.65 against the franc this morning and traded at 251.31 at 9:46 a.m. in Budapest. The government forecasts economic growth of about 3.5 percent a year through 2015 after an estimated 3.1 percent expansion this year and 1.2 percent in 2010.
Persisting franc strength would curb Hungary’s growth potential by 0.5 percentage point, Orban’s chief of staff, Mihaly Varga, said on July 22. The forint that day closed at 228.61 per franc.
Hungary’s industrial-output growth, the driver of economic expansion, fell to its lowest level since December 2009 in June as exports slumped. Output advanced 1 percent from a year earlier and fell 0.6 percent on the month, the statistics office said today.
CDS Costs Surge
The cost of protecting against Hungarian non-payment for five years using credit-default swaps has surged 23 basis points in the past month to 392.29 basis points today, the highest in more than six months. A basis point is 0.01 percentage point. The forint fell 3.3 percent against the euro, the second-worst performance among more than 20 emerging-market currencies tracked by Bloomberg after the Turkish lira.
The benchmark BUX stock index plunged 12.7 percent in the same period, its worst one-month performance since August 2009. The losses were led by Foldhitel es Jelzalogbank Nyrt., the country’s second-largest mortgage lender, which fell 25 percent and OTP Bank Nyrt., Hungary’s biggest bank, which dropped 23 percent. The BUX declined 2.8 percent to 19,510.52 as of 9:54 a.m. in Budapest, dropping for a fifth day to its lowest since Sept. 15, 2009.
The franc remains the world’s best performer this year after the central bank unexpectedly cut interest rates and said it will increase supplies of the currency to money markets.
‘Unlikely to Dissipate’
Sixty percent of Hungary’s household and corporate loans are denominated in foreign currencies, with two-thirds of that being in Swiss francs, according to Peter Attard Montalto, an economist at Nomura. That compares with 33 percent and 20 percent in Poland, Montalto wrote in an e-mailed note last month.
The franc has room to strengthen further as its haven status is “unlikely to dissipate, Lena Komileva, global head of Group-of-10 strategy at Brown Brothers Harriman & Co. in London, said in an interview on Bloomberg Radio’s ‘‘Bloomberg Surveillance’’ on Aug. 3. The franc may remain the ‘‘least ugly’’ among global currencies, according to Daragh Maher, deputy head of global foreign-exchange strategy at Credit Agricole SA in London.
‘‘No currency do you look at and kind of go ‘well, that’s fantastic,’"Maher said in a Bloomberg Radio interview on Aug. 2. ‘‘Maybe aside’’ from the franc.
Local Governments Struggle
An agreement between Hungary’s government and banks operating in the country to temporarily fix exchange rates on foreign-currency loans to help homeowners is ‘‘unlikely to have a material, long-term positive impact on households’ ability to service their debt,’’ Fitch Ratings said June 3.
Hungary’s local governments are also struggling to service their 600 billion forint of franc debt and on Aug. 3 asked to delay principal payments on some foreign-currency debt.
Delaying payment on municipal bonds ‘‘would be tantamount to a restructuring,’’ Tim Ash, head of emerging-markets research at RBS, said in an e-mail on Aug. 3, adding that it won’t mean ‘‘any cross-default implications to the sovereign.’’
Hungary’s credit rating may be downgraded to junk by Moody’s Investors Service and Standard & Poor’s, which both rate it at their lowest investment grade with a negative outlook. Fitch Ratings, which rates it the same level, raised its outlook to stable June 6, citing government plans to cut debt.
‘War on Debt’
State borrowing fell to 77 percent of gross domestic product in June from 81 percent last year. Orban’s government, which has declared a ‘‘war on debt,” plans to cut spending by as much as $4.6 billion a year by 2013.
Hungary’s central bank, which left its benchmark rate unchanged for a sixth month on July 26, is in a “catch-22 situation,” said Simon Quijano-Evans, an economist at ING Groep NV in London. Lower interest rates would reduce demand for forint-denominated assets, while rate increases to strengthen the currency would hurt consumers more, he said.
“There’s nothing anyone can really do against this,” said Quijano-Evans. “The only thing that can really help is the calming of global sentiment. The Swiss franc is seen as a safe haven and there’s nothing an individual central bank can do against that.”
To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
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