Raiffeisen Bank International AG and other Hungarian banks are in “constructive” talks with the government to deal with foreign-currency debt of more than 413 billion forint ($1.9 billion) at municipalities.
Prime Minister Viktor Orban’s approach to debt relief for municipalities is more consensual than it was when he forced banks to swallow currency losses on mortgages last year, Raiffeisen Chief Executive Officer Herbert Stepic told analysts in London today. Stepic, whose Vienna-based bank is the third-largest lender in eastern Europe, said he was confident a deal would be found.
“We’re in a positive, constructive dialog on finding a common solution,” Stepic said. “We believe we will be able to find a common solution with the government.” A solution will probably mainly consist of extending the maturities of municipalities’ debt, he said.
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. They have increasingly borrowed in foreign currencies since 2007 after the government reduced funding to cut the budget deficit, which in 2006 was the widest in the European Union at 9.3 percent of economic output.
OTP Bank Nyrt., Hungary’s largest lender, last month offered 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.
The law that imposed franc-mortgage losses last year pushed Hungary’s banking industry into a sector-wide loss for the first time in 13 years last year, which was exacerbated by rising bad loan provisions and a special industry tax also slapped on the sector by Orban’s government.
Raiffeisen had a 355 million-euro ($473 million) loss in the neighboring country and had to inject fresh funds in almost the same amount into its local unit Raiffeisen Bank Zrt. -- the first bank it founded in eastern Europe 1987, before the Iron Curtain fell two years later.
“Orban was a risk and is a risk,” Stepic said. “The Orban risk is less significant now than it used to be when he came into power,” he added, because the premier is seeking aid from the International Monetary Fund which will put him into a “tight corset.”
Total municipal debt stood at 983 billion forint at the end of 2011, of which franc-denominated debt was 413 billion forint. Raiffeisen has loaned the equivalent of 800 million euros to municipalities, of which about 600 million euros are denominated in francs, it said today. The forint has weakened 40 percent against the Swiss franc since the middle of 2008, when the bulk of franc-denominated bonds were issued.
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.