Hungary’s government has made its final offer to banks operating in the country on a package to convert their existing foreign currency loan portfolios into domestic currency, limiting the exposure of both lenders and borrowers to the volatile forint exchange rate.
But the proposal runs the risk of adding to the burden on bank balance sheets at a time when foreign lenders appear to be cutting funding to their Hungarian subsidiaries, and as businesses throughout eastern Europe struggle to attract bank finance.
The government is proposing a range of measures, including the conversion of outstanding loans at a rate favourable to borrowers; a temporary government payments guarantee; and a partial lifting of a moratorium on repossessions. The government also plans to keep in place an emergency windfall tax on banks until the end of 2014 but will aim to soften it with incentives to encourage small business lending.
The offer, which comes after banks reportedly rejected earlier proposals aimed at resolving a dispute over foreign currency loans, was detailed in a letter, seen by Emerging Markets, from György Matolcsy, the national economy minister, to the head of the country’s banking association.
“My negotiating mandate [from the government] does not allow me to enter into a broader or narrower agreement than that which is enclosed with this letter,” Matolcsy wrote.
Gábor Ambrus, an analyst at the London consultancy 4Cast, said some of the moves were “very generous to debtors” and that the package as a whole “shifts a large burden [onto] bank balance sheets from households.”
In its financial stability report last month, Hungary’s national bank, whose president Andras Simor is at loggerheads with the populist conservative government, warned that fund outflows from Hungarian subsidiaries appeared to be growing.
“In the second half of 2010, there were substantial withdrawals of foreign funds from banks,” the report said, adding that the withdrawal of funding could reflect “a reallocation of funds between different subsidiaries”. The central bank noted that foreign funding was either stable or rising in neighbouring countries.
The offer allows mortgage borrowers in danger of default on a foreign-currency mortgage to convert their debt into forints at a rate of Ft160 to the Swiss franc, well below the Ft180 level at which most Swiss franc mortgages were taken out, and below the Ft190 level which had been under discussion previously. Instalments above this rate will be put into a special account with a fixed interest rate which will be guaranteed by the government until the end of 2014.
Foreign-currency mortgage lending took off in Hungary in the 2000s when Austrian and Italian entrants into the lending market found they could gain a competitive advantage over domestic incumbents by taking advantage of their easier access to cheaper euro and Swiss franc funding to attract custom.
By the time the credit crunch hit, some two thirds of all outstanding credit was foreign currency-denominated, leaving borrowers and lenders exposed as the forint fell. Hungary levied a E1 billion windfall tax on banks last summer after terminating its E20 billion IMF bail-out deal.