The deputy governor of the National Bank of Hungary has questioned whether the conversion of outstanding foreign exchange loans into local currencies is a viable solution to the country’s loans crisis.
In one of a series of criticisms of government policy, Júlia Király said total conversion of foreign-currency denominated loans into local currency was not a long-term solution to the problem of currency mismatch.
“You are just transferring the burden, whether it’s from the borrower to the bank, or from the bank to the government,” she said. “The cost is still borne by somebody. It remains country risk.”
Earlier this week, the Hungarian government announced plans to offer borrowers the chance to convert their foreign currency debts into Hungarian forints at a fixed, advantageous interest rate.
Any sum left outstanding after the conversion would be placed in a separate account guaranteed for a period by the government. Banks have yet to decide whether to accept the plan, on which the government will take a final decision on Tuesday.
Foreign currency lending took off across much of central and eastern Europe during the last decade as banks competed for custom by offering euro and Swiss franc denominated loans at lower interest rates than local currency loans.
When the credit crunch hit, bringing with it extreme volatility for emerging Europe’s currencies, many borrowers were left unable to pay, while banks were stuck with a non-performing loan problem.
But Király insisted it was a mistake to look for an easy solution. More than 50% of outstanding consumer loans in the country are in foreign currency, and more than 70% of mortgage loans are in Swiss francs.
“When your overall risk premium is falling it becomes much easier to deal with this problem. You need to grow the FX loans out of your portfolio. There is no one-step solution,” she said.
Hungary, which is forecast to return to growth this year, has seen significant improvements in its risk premium over the past 18 months. “If you do as we have done, implementing a government consolidation programme while pursuing the same, consistent line of monetary policy – inflation targeting – you can reduce your risk premium,” she said.
The government and the central bank have been at loggerheads since elections last year brought a populist conservative government to power. Its prime minister, Viktor Orbán, has made no secret of his desire to see the back of András Simor, the central bank governor, who was appointed by a previous government.
Király welcomed the government’s decision to backtrack on an earlier ban on foreign currency lending. “We didn’t agree with the ban on FX lending. We agreed more with the approach of the Vienna Initiative – a macro-prudential approach.”
The government’s nationalization of E10bn in private pension assets would, she said, lead to higher aggregate saving in the long run. “Once people realise they have to rely on their own savings rather than their private pensions, we expect people to save more,” she said.