Hungary ‘Most Likely’ to Impose Haircut on FX Debt, Capital Says

Hungary is “most likely” to partially forgive foreign-currency household mortgages and some foreign-currency corporate loans with the government taking a bigger share of the resulting losses, analysts at Capital Economics Plc said.

Hungary will probably use debt write-offs as part of the government’s “unorthodox” policy kit, Neil Shearing and William Jackson, London-based economists at Capital Economics said in an e-mailed report today. “It looks most likely that haircuts will be imposed on foreign-currency mortgages (again) as well as small- and medium-size enterprise debts.”

Prime Minister Viktor Orban temporarily allowed the early repayment of foreign-currency mortgages at below-market rates in 2011, forcing lenders to swallow losses and making the banking system unprofitable for the first time in 13 years. The Cabinet is considering further steps to help borrowers, Economy Minister Mihaly Varga said March 4 without elaborating.

The forint slid as much as 1.1 percent before paring its loss to 0.2 percent at 305.95 per euro by 3:10 p.m. in Budapest, extending its slump this month to 3.5 percent. OTP Bank Nyrt. (OTP), the country’s largest lender, dropped as much as 4.5 percent and was trading 3.8 percent lower at 4,474 forint, its weakest since Jan. 16.

The central bank “could actually take the burden” for the debt write-offs by selling foreign currency from its reserves to commercial banks in return for forint assets of a lower value, according to Capital Economics. The Magyar Nemzeti Bank could use 4.5 billion euros ($5.8 billion ) from reserves of around 36 billion euros and still have enough to cover short-term external debt maturing within the next 12 months, according to the note.

Hungarian households’ foreign-currency mortgages stood at 4.03 trillion forint on Jan. 31, of which 1.05 trillion forint were more than 90 days overdue, according to data from the financial market authority Pszaf. Hungarians borrowed predominantly in Swiss francs to take advantage of lower interest rates until a subsequent weakening of the forint sent repayments soaring and boosted the ratio of bad debt.

The government wants banks to convert foreign-currency mortgages to forint and forgive part of the debt for borrowers with payments overdue more than 90 days, news website Nol said March 6. News portal Hvg.hu reported March 7 that the Cabinet is seeking to convert all foreign-currency loans to forint and may use part of the central bank’s reserves for the plan. The government and the central bank have refused to comment on the reports.

Capital Economics estimates the central bank may use 9 billion euros from its reserves under a debt write-off plan, according to the note. “But even with a write-off of this scale, total foreign-currency debt would still come in at over 100 percent of gross domestic product,” the economists said.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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