Hungary Central Banker Weighs FX Mortgage Principal Cut

Hungary’s government should consider cutting the outstanding principal on foreign-currency mortgages, central bank Vice President Adam Balog said in a report.

The proposal would expand to the principal of the loans a plan in which the government and banks split the interest payments of the mostly Swiss-franc loans on the share above 180 forint per franc, according to the report on the Budapest-based central bank’s website today.

“This wouldn’t be a one-time, immediate foreign-currency conversion of the outstanding debt but the gradual yet complete conversion into forint and elimination of the exchange-rate risk,” Balog said in the report, co-written with Magyar Nemzeti Bank Managing Director Marton Nagy.

Prime Minister Viktor Orban’s government last month pledged to phase out $8 billion in foreign-currency mortgages to reduce the vulnerability of households to exchange-rate swings after installments soared as the forint weakened during the economic crisis. The ratio of non-performing foreign-currency mortgage-related loans reached 21 percent at the end of June, according to central bank data.

The forint strengthened 0.2 percent to 241.05 per Swiss franc by 1:15 p.m. in Budapest. It lost 32 percent in the two years through Sept. 1, 2009, more than any of the 24 emerging-market currencies tracked by Bloomberg, except the Romanian leu.

Exchange-Rate Barrier

The proposal may help boost participation in an “exchange-rate barrier” plan, which drew 37 percent of eligible borrowers as of June 2012, Balog and Nagy said. So far, 257,600 borrowers holding 1.2 trillion forint ($5.3 billion) of foreign-currency mortgage debt decided against joining the plan.

Some borrowers may have decided against joining because the program only postpones capital repayment on the part above the fixed exchange rate by five years, after which installments may rise about 10 percent, Balog and Nagy wrote.

The government in 2011 temporarily allowed foreign-currency mortgages to be repaid at below-market rates, forcing lenders to swallow losses. The forint plunged 15 percent against the euro in the second half of 2011, the most in the world.

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