OTP Bank Nyrt., Hungary’s largest lender, is offering to fix the exchange rate on Swiss franc-denominated municipal bonds at almost 17 percent below market rates as it seeks to prevent an increase in bad loans.
Municipalities can fix the exchange rate on their Swiss-franc denominated municipality bond repayments at 200 forint per franc for a three-year period, OTP Managing Director Pal Kovacs said at a press conference in Budapest today. The difference resulting from fixed and market rates will be booked in a separate forint account, will carry an interest and will have to be repaid after 2014.
“This structure won’t solve the overall problem of municipality debt, however it helps in offering stable and predictable debt financing at a time when local councils’ liquidity position isn’t at its strongest,” OTP Deputy Chief Executive Officer Laszlo Wolf said today. He predicts other banks will announce similar products.
Local governments are struggling to repay their foreign-currency debt as the forint weakened and a grace period on bond principal repayments ran out in 2011. Local administrations have increasingly borrowed in foreign currencies since 2007 after the government reduced funding to municipalities to cut the budget deficit, which in 2006 was the widest in the European Union at 9.3 percent of economic output.
Municipal Debt Total
Total municipality debt stood at 983 billion forint ($4.6 billion) at the end of 2011, of which franc-denominated debt was 413 billion forint. OTP had 98 billion forint in franc-denominated municipality bonds on its books in the period and a non-performing loan ratio of less than 3 percent, Wolf said.
The forint has weakened 40 percent against the Swiss franc since the middle of 2008, when the bulk of franc-denominated bonds were issued. The currency has gained 8.9 percent against the euro this year, the best global performance.
Local governments had an average grace period of 3.8 years before the start of the principal payment of their bonds, ending in 2011 for 45 percent of them, Price Waterhouse Coopers said in a study last year.
Six of Hungary’s seven biggest banks have foreign parents, including Italy’s Intesa Sanpaolo SpA and UniCredit SpA, Austria’s Erste Group Bank AG and Germany’s BayernLB. Only OTP Bank Nyrt. is still domestically owned.