Hungary’s plan to add euro bonds to household debt offerings while aid talks stall risks starving local banks of deposits and may prolong the second recession in four years, policy makers and investors in Budapest said.
The Cabinet will offer at least 60 billion forint ($272 million) worth of the three-year euro-denominated debt directly to citizens, paying euro-area inflation plus 2.5 percentage points, the state debt agency said on Oct. 11. That would amount to a yield of 5.2 percent, based on last year’s data, while the average rate on euro deposits for two years or more was 2.09 percent at the end of August, the central bank said.
Hungary, which already offers residents Treasury bills and inflation-linked forint bonds, is diversifying debt financing to manage the highest debt level in the European Union’s east as International Monetary Fund aid talks remain deadlocked. Channeling funds from bank deposits to the budget may hurt local banks, said Viktor Szabo at Aberdeen Asset Management, as corporate lending fell the most among the EU’s east since 2008.
“This is going to have a crowding-out effect because it’s going to drain foreign-currency deposits at local banks,” said Szabo, who helps manage $9.3 billion at Aberdeen in London. “It’s not going to be positive as it’s already expensive for banks to get foreign-currency funding.”
Hungarian corporate credit volumes as of July plunged 20 percent from 2008 levels, according to an Oct. 16 presentation by central bank President Andras Simor, who warned of a “creditless economy.” Corporate credit volume in Poland, Romania and Bulgaria rose 15 percent in the period, Simor said.
The lack of corporate lending in Hungary is the result of banks’ strategy to lower their loan-to-deposit ratios by cutting credit, and not because of the government debt sales to savers, officials, including Prime Minister Viktor Orban and Antal Rogan, the ruling Fidesz party’s parliamentary group leader, have said this month.
“Banks stopped lending already, deleveraging is going on in Hungary,” Orban said on Oct. 17.
Hungary sold 37.5 billion forint in government bonds at an auction today, 7.5 billion forint less than planned, as borrowing costs rose. The sale included 7.5 billion forint in 10-year debt, the lowest amount sold for that maturity at auctions this year after demand plunged, according to data from the Debt Management Agency.
The Cabinet cut its gross domestic product forecast earlier this month to a contraction of 1.2 percent, compared with a previous growth estimate of 0.1 percent, and expects the economy to grow 0.9 percent in 2013 versus an initial projection of 1.6 percent. The potential growth rate is near zero, Mihaly Varga, the minister in charge of aid talks, said on Oct. 16.
Hungary’s economic performance will be the weakest in both 2012 and 2013 among non-euro EU nations, according to the bloc’s latest projection published in May.
The country already raised 355 billion forint in retail local-currency debt, compared with an original target of 36 billion forint, according to debt agency data. The agency may decide to increase the amount of retail euro-denominated bonds, depending on demand, Laszlo Andras Borbely, deputy head of the debt agency, said on Oct. 11.
The offerings are shrinking local bank deposits at a time when foreign-owned parents tell their units in Hungary to rely on domestic savings for credit expansion. Plunging profitability prompted parent banks to cut funding by 36 percent since the end of 2008, Fitch Ratings said Oct. 16. The company rates Hungary’s sovereign credit non-investment grade.
“Crowding out foreign-currency deposits from local banks would be negative for cross-currency basis and depress banks’ profitability further,” Eszter Gargyan, an economist at Citigroup Inc. in Budapest, said in a note on Oct. 11. She said demand may be “much higher” for the euro-denominated bond than the debt agency’s projection.
OTP Bank (OTP) Nyrt., Hungary’s No. 1 lender with a 29.5 percent market share, competes with foreign banks including KBC Groep NV (KBC), Bayerische Landesbank, Erste Group Bank AG (EBS), Intesa SanPaolo SpA (ISP), Raiffeisen Bank International AG (RBI) and UniCredit SpA. (UCG)
Banks are cutting lending after being stung by Orban’s policy of squeezing lenders to plug budget holes and as European regulators step up pressure on banks to boost capital buffers.
Most recently, the Cabinet this month backtracked on a pledge to halve a special bank tax in 2013 and doubled the rate of a planned financial transaction tax to 0.2 percent to plug budget holes and avoid a cut in EU funds. Orban has rejected IMF recommendations to ease the burden on banks, saying lenders needed to pay their “fair share.”
Domestic lenders turned unprofitable for the first time in 13 years in 2011 as the ratio of household and corporate bad loans rose to almost 20 percent and banks were forced to take losses on foreign-currency mortgages.
Households had local-currency savings of 2.57 trillion forint at the end of August, the lowest level since February 2011, while they had 9 billion euros in euro-denominated bank deposits, according to central bank data.
“In the past one and a half years we have seen no increase in household savings, while the state exerts a crowding-out effect and this could damage the financial system in the long term,” central bank Deputy Governor Julia Kiraly said at an Oct. 16 conference.