Hungary’s Battered Banks Brace for Latest Bad-Debt Cure

Budapest hairdresser Gyongyver Peter, whose Swiss-franc mortgage payments have risen to equal her husband’s entire salary in the last four years, is skeptical the Hungarian government can help her after three previous efforts fell short.

“I’m concerned they won’t come up with a real solution,” Peter said. “They’re doing this whole rescue effort only because the election is approaching.”

Banks and investors are more confident the government will act, and they expect it to be at their expense. Financial stocks and the Hungarian forint dropped after Justice Minister Tibor Navracsics first revealed in July that a new debt-relief plan was under discussion. The country’s banks lost $1.7 billion during a 2011 program and reacted by pulling out capital equal to 23 percent of gross domestic product and cutting new lending.

Prime Minister Viktor Orban’s government is promising to ease the pressure on Hungarians with foreign-currency mortgages after earlier initiatives failed to help almost half a million borrowers whose costs have soared since the forint’s plunge in the financial crisis. Orban has also sought to reassure banks that their interests will be taken into account.

International lenders including UniCredit SpA, KBC Groep NV, Erste Group Bank AG, Intesa SanPaolo SpA, Raiffeisen Bank International AG control three-quarters of Hungary’s banking industry. On top of the losses in the debt plans, the lenders were also hit with Europe’s highest banking levy.

No ‘Blitzkrieg’

The prime minister said in July that the government’s ultimate goal is to “end the institution” of foreign currency mortgages in the country. At the same time, he and other officials assured lenders that any relief would be limited in scope and that they needn’t fear a repeat of 2011, which Orban described as a “Blitzkrieg” on financial institutions.

A modest approach would fail to resolve a crisis that has contributed to two recessions in the past four years as soaring loan payments caused household consumption to shrink in all except four quarters since September 2008. Credit to companies has been contracting since the last quarter of 2008 and lending to households has dropped since the first three months of 2009, according to the central bank.

“I don’t think the plan can deliver any larger changes simply because the banks aren’t going to accept it,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said in a phone interview. “The more pressure they put on the banks, the more capital is drained out of Hungary.”

Currency Woes

The forint dropped 2.5 percent against the euro since the justice minister’s July 16 statement that a new relief plan was being prepared. The currency had gained 3.1 percent in the second quarter, the most among 31 major currencies tracked by Bloomberg. It traded at 298.88 per euro at 4:08 p.m. in Budapest.

OTP Bank Nyrt., Hungary’s biggest lender, has tumbled 18 percent since July 16 and Chief Executive Officer Sandor Csanyi said the government plan contributed to his decision to sell his stake in the bank.

The government expects to present its relief plan by the end of the year, ahead of elections in 2014. In the meantime, borrowers and lenders are left to interpret often contradictory suggestions from officials.

Under the latest proposal, banks would be required to change all foreign-currency mortgage contracts into forint by Nov. 1, with the lenders bearing the brunt of the resulting losses. Banks have a “moral obligation” to pay because they sold the products “slyly” Orban said on public radio in Sept. 6. The government will “eliminate” foreign-currency mortgages if commercial banks miss the deadline, he said.

Joint Responsibility

Banks are urging further talks and insist the government shares the cost of converting the loans. The Hungarian Banking Association will meet on Sept. 16 to discuss the latest idea, which risks “wrecking the forint in days,” Chairman Mihaly Patai said in an interview.

“The banking industry considers it unimaginable to find an immediate solution to the situation of foreign-currency borrowers without a substantial contribution of the government,” the association said in a statement yesterday. “The solution is the joint responsibility of all three parties responsible in creating the current stock of household foreign-currency loans -- the banks, clients and the government.”

Banks should present their proposal “to foreign-currency borrowers and not to the government,” Economy Minister Mihaly Varga told Banking Association President Mihaly Patai, according to a ministry statement today.

Home Equity

Home-equity loans, which make up almost half of the foreign-currency borrowing still outstanding, may be excluded from the plan, Economy Ministry State Secretary Gabor Orban said in a July 26 interview. Since then, other officials have suggested that the plan will include both types of loans.

Hungarians hold 1.68 trillion forint ($7.4 billion) of home equity loans -- which can be used for purchases other than homes -- and 1.81 trillion forint in foreign exchange mortgages, central bank data show. The loans account for 13 percent of the country’s economic output, according to data compiled by the European Bank for Reconstruction and Development. About two-thirds of all Hungarian mortgages are denominated in Swiss francs.

In the years before 2008, when average growth in eastern Europe topped 5 percent, banks lured homebuyers from Poland to Croatia with mortgages denominated in euros and Swiss francs, often at less than half the local-currency rates. The arrangement hurt Hungarians the most when the financial crisis hit, causing the forint to fall 42 percent against the franc in the past five years.

Rescue’s Limits

Orban, beginning his second stint as prime minister in 2010, moved to ease the burden on mortgage holders through measures that included forcing lenders to accept repayments of loans in a lump sum at below-market rates. While the 2011 plan reduced outstanding foreign-currency home loans by a fifth, it left out borrowers who couldn’t stump up the cash.

Peter and her husband, who borrowed 99,000 Swiss francs ($106,000) took advantage of a government fixed-rate exchange program that lowered their monthly payments while leaving them with a growing sum to pay off in the future. About 40 percent of borrowers took part in the plan.

“This program is a partial relief as it only alleviates our problems temporarily,” she said. “We will eventually have to foot a higher bill at one point in the future.”

Another Hit

Hungarian lenders estimate that converting foreign-currency mortgages into forint may cost as much as 600 billion forint, the weekly Figyelo reported on Aug. 8, without saying where it got the information.

Banks “might be willing to do a deal, but it’s not going to be without a fight,” Otilia Dhand, an analyst at Teneo Intelligence, a London-based political risk evaluator, said by phone on Aug. 19. “Ultimately, the government is the one calling the shots.”

While the government is open to sharing the costs of a new plan with banks, it’s limited by its own goal of keeping the budget deficit within 3 percent of gross domestic product to remain outside the European Union’s excessive-deficit monitoring, Dhand said.

“If it could be sorted out easily, this would have been done already” Pasquale Diana, a London-based economist at Morgan Stanley said in an Aug. 13 phone interview. “The government doesn’t have a lot of room on the fiscal side, but some form of burden-sharing may emerge as a reasonable compromise.”

Banker’s Warning

Erste Bank Chief Executive Officer Andreas Treichl said he believes the country’s leaders recognize that further pain for the banks would also hurt Hungary’s economy.

“There is a growing awareness in Hungary that enough is enough and a further move against the financial system would not only hurt the financial system but the country overall,” Treichl said on July 30 earnings conference call. “If politicians make it clear that they don’t want you to be there, at one point in time you have to exit.”

Peter said she may also throw in the towel after payments on her home in Veresegyhaz, about 30 kilometers (19 miles) from Budapest, have prevented the couple from going on vacation for five years. When her 22-year-old Volkswagen broke down last year, the only replacement Peter could afford was a 15-year-old Suzuki.

“I very much hope the new program will offer meaningful help for us,” she said. “If the government forces us into a solution that’s not helpful or offers only a halfway solution, I will stop paying back the loan and I think a lot of people will do the same.”