Hungary’s Orban Makes World’s Best Trade on Swiss Franc Loans

Hungarian Prime Minister Viktor Orban
Hungarian Prime Minister Viktor Orban in November forced Hungarian banks to make financial arrangements to convert 3.3 trillion forint ($12 billion) in foreign-currency mortgages, overwhelmingly denominated in Swiss francs, into local currency. Photographer: Akos Stiller/Bloomberg

Hungarian Prime Minister Viktor Orban, often criticized for punishing banks, is being hailed as a hero for warding off financial disaster with his quest to rid the country of mortgages worth billions of Swiss francs.

Orban in November forced Hungarian banks to make financial arrangements to convert 3.3 trillion forint ($12 billion) in foreign-currency mortgages, overwhelmingly denominated in Swiss francs, into local currency. The move, to be completed this year, prevented a 700 billion-forint jump in household debt when the Swiss National Bank set the franc free yesterday, Hungary’s monetary authority said.

“This was top notch,” Laszlo Szabo, president of Budapest-based Concorde Asset Management, which manages $1.9 billion in assets, said by e-mail. “We may often criticize the Hungarian government and central bank, but this is the time to congratulate them for the incredible timing.”

The outcome is the crowning achievement of Orban’s drive to shield borrowers from currency swings. The issue moved to the top of the country’s political agenda after the global financial crisis sent the forint tumbling in 2008, triggering a wave of defaults. This time, even as the Hungarian currency slumped 16 percent against the franc in two days, mortgage holders and banks were off the hook.

Hungary’s economy now faces “limited impact” from the franc’s strengthening, the central bank said. The estimated 700 billion-forint burden would have been equal to about 2 percent of gross domestic product.

Currency Risk

The forint pared losses against the Swiss franc today, strengthening 4.3 percent to 316.58 by 2:30 p.m. in Budapest. It traded at 265 yesterday before the SNB’s announcement sent it to as much as 378.94.

OTP Bank Nyrt., Hungary’s largest lender, and Erste Group Bank said they’ve covered their currency risk in Hungary. OTP competes mostly with foreign banks including Raiffeisen Bank International AG, UniCredit SpA, Intesa Sanpaolo SpA and KBC Groep NV.

Swiss-franc loans became ubiquitous in Hungary in the last decade as people sought to dodge higher forint interest rates to finance everything from homes, cars, household appliances and even vacations. When the local currency plunged as the 2008 financial crisis engulfed the country, loan repayments nearly doubled in some cases and defaults soared.

Non-performing loans on foreign-currency mortgages were 23 percent of the total in the first half of last year, compared with 13 percent on forint mortgages, according to central bank data.

Banks Squeal

The pain felt by hundreds of thousands of Swiss franc borrowers pushed Orban to crack down on banks after coming to power in 2010, which he three years later described as squeezing lenders until they “squeal but still open the next day.” It also strengthened his determination to eliminate franc loans from the lives of Hungarians as well as from banks’ loan books.

The measures included imposing Europe’s highest bank levy, based on assets, as well as a tax on financial transactions. He allowed borrowers who could afford it to repay foreign-currency loans at below-market rates in a lump sum, costing lenders $1.7 billion in 2011. Other homeowners had the option to fix installments at below-market exchange rates, with banks, borrowers and the government splitting the costs.

Last year, pushed by the Orban government, Hungary’s top court declared as “unfair” bank practices to unilaterally increase interest rates on foreign-currency loans as well as the margins levied when calculating installments on foreign-currency loans. Lenders are in the process of refunding 1 trillion forint as a result.

Grudging Respect

The full conversion of the foreign-currency mortgages may now win Orban some grudging respect from bankers.

“Even though the government’s intention wasn’t to save local banks, the loan conversion is a huge relief for lenders as they would have seen their risk cost skyrocket had these measures not been put in place,” Zoltan Reczey, an analyst at Budapest-based brokerage Buda-Cash Zrt., said by phone. “There would’ve been mass hysteria.”

It was a close call. Last year, the government and the central bank debated whether to convert mortgages at once or to phase them out gradually in a bid to protect the forint.

Authorities decided on the former, with the central bank agreeing to make its foreign-currency reserves available to banks for the currency transactions to shield the forint’s exchange rate. They also agreed to demands by lenders to do the conversions at market rates.

That meant that a day after the Swiss central bank’s move, it was Polish and Austrian borrowers, with $35 billion and $29 billion in Swiss franc mortgages outstanding, respectively, experiencing headaches on how to repay ballooning debts as Hungarian borrowers and banks could breathe a sigh of relief.

“You need luck in politics, but credit where credit is due,” Tim Ash, an economist at Standard Bank Group Ltd. in London, said by e-mail. “Hungary dodged this bullet by literally days.”

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