Hungary’s Foreign-Loan Plan May Damage Economic Growth, Budget, S&P Says

Hungary’s plan to allow borrowers to repay foreign-currency mortgages below market rates may hurt lending, growth and public finances, according to Standard and Poor’s, which rates the country’s debt a step above junk.

“We have to take a view on the predictability of government policies to support sustainable growth performance, which is essential to anchor public finances,” Frank Gill, a London-based senior director at S&P, said in a telephone interview today. “We remain concerned.”

Hungary plans to allow early repayment on mortgages denominated in Swiss francs or euros at more than 20 percent below market rates, forcing lenders to swallow the losses, Prime Minister Viktor Orban said yesterday. The European Union said the proposal may violate the bloc’s rules.

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to reduce its exposure to currency swings and help borrowers after the Alpine country’s currency rose to a record, triggering defaults and pushing up monthly payments. S&P rates Hungary ‘BBB-’, its lowest investment grade, with a negative outlook, which means it’s more likely to cut the rating than to raise it or keep it unchanged.

Stocks, Forint, CDS

OTP Bank Nyrt., Hungary’s largest lender, dropped 1.5 percent to 3,685 forint at 3:10 p.m. in Budapest. It fell 12 percent since the plan was unveiled on Sept. 9. Raiffeisen Bank International AG (RBI), which also has a unit in Hungary, rose 0.8 percent to 23.65 euros in Vienna after falling 15 percent in the last two trading days.

The forint weakened for a second day against the euro and for a fourth day against the Swiss franc, trading at 283.44 forint and 235.41 forint respectively. The cost of ensuring against default on Hungarian government bonds for five years using credit-default swaps was 459 basis points today, little changed from yesterday, when it reached the highest in almost 2 1/2 years, according to data provider CMA.

OTP competes mostly with units of international banks, including Raiffeisen, Erste Group Bank AG (EBS), UniCredit SpA (UCG), Bayerische Landesbank, KBC Groep NV (KBC), and Intesa Sanpaolo SpA. (ISP) The government’s plan is “unacceptable” to lenders, the Hungarian Banking Association said yesterday.

The government doesn’t expect “masses” to take advantage of the Cabinet’s mortgage proposal as legislators won’t force banks to issue forint loans, MTI state news service reported today, citing Economy Minister Gyorgy Matolcsy.

‘Significant Threat’

The plan to fix exchange rates poses a “significant threat” to the financial industry and the wider economy, the Banking Association said. The lenders are “ready” to turn to Hungary’s Constitutional Court and the EU to fight the plan, it said.

“Any measures that would impose a capital loss on foreign banks invested in Hungary could accelerate the shrinkage of their local balance sheets, tightening credit conditions, and weighing on domestic demand, overall investment activity and growth,” S&P’s Gill said. “That will negatively impact public finances.”

Hungary’s economy may grow 1.4 percent in 2012, compared with the government’s forecast of 2 percent, Gill said.

The EU will examine whether the plan violates rules on cross-border capital movements and state subsidies, European Commission spokesman Amadeu Altafaj told reporters in Brussels today.

‘Serious Negative Impact’

“It would have a serious negative impact on the Hungarian banking system,” Altafaj said. It may lead banks to tighten credit and damage the investment climate, with “negative repercussions for the Hungarian economy.”

The plan “is in contravention of all expectations an investor may have in a functioning market economy and democracy,” Austrian Finance Minister Maria Fekter said in a letter to Matolcsy yesterday.

Orban roiled markets last year by effectively nationalizing private pension funds, levying extraordinary taxes on banks, energy, retail and telecommunication companies to plug budget holes, curbing the power of the Constitutional Court, eliminating an independent Fiscal Council and creating a media watchdog staffed by his allies.

Latest Attempt

The franc-fixing plan for mortgage repayments is the latest attempt to help borrowers, many of whom took out loans at about 150 forint per franc and are struggling with their payments as investors sought to place funds in Swiss francs to avoid riskier euros and dollars.

The government agreed with lenders in May to offer household borrowers who aren’t late with repayments the chance to fix a franc exchange rate of 180 forint for their installments until the end of 2014. The difference between the fixed-rate payments and those that would have resulted under actual exchange rates will be recorded in separate forint accounts to be settled from 2015.

That proposal only offered a “temporary solution” and the people’s demand for a “permanent solution beyond a temporary one is justified,” Orban said Sept. 2.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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