FX: Hungary rumbles on

The long struggle between Hungary’s banks and the Fidesz government over foreign currency loans is finally approaching the endgame. Under legislation passed in July, the country’s banking sector will have to return as much as €2 billion to households who took on euro and Swiss franc debt in the boom years before the financial crisis, but then faced soaring repayments after the forint collapsed in 2008. Further legislation, scheduled for as early as September, is due to mandate the conversion of Hungary’s entire stock of FX retail loans into local currency, likely at below-market rates, and analysts say the bill could easily match that for the first round of compensation.

Hungary’s banks, which have already suffered repeated state depredations in the form of not-so-temporary emergency bank levies and a swingeing financial transaction tax, not to mention previous rounds of forced FX mortgage conversions at unfavourable rates, are in for another very painful year.

The €2 billion of compensation, meanwhile, whether passed on to customers in cash or as reduced monthly payments, will bolster household incomes. That in turn, it is hoped, will revive consumer demand and thus give a much-needed boost to growth in the wider economy, possibly even inspiring the long-awaited return of demand for new lending.

Above all, however, what bankers in Budapest – and at parent bank headquarters in Vienna, Turin, Munich and beyond – are looking forward to is finally achieving certainty and closure on an issue that has plagued the sector since Viktor Orban’s administration came to power in 2010.

Yet it would be rash to assume that, with the conversion of all €12 billion of household FX debt into local currency, the risk of state interference in the banking sector will be reduced. To be sure, interest rates in Hungary stand at just 2.1% after two years of consistent cutting by the central bank, and are expected to remain at historic lows for at least the next year or so.

If Hungary’s GDP continues to grow at anywhere close to the 3.5% rate seen in the first quarter, however, it will not be long before inflationary pressures start to build. If they are met with incremental and timely rate hikes, all well and good.

Increasing politicization

Analysts warn, however, that the increasing politicization of the central bank – demonstrated by the replacement in March last year of independent governor Andras Simor with Fidesz stalwart Gyorgy Matolcsy – could result in rates being kept artificially low for too long in the pursuit of economic growth.

That raises the spectre of emergency rate hikes further down the line, which would imply substantial increases in repayments on mortgages denominated in local currency. Yet whether or not Hungarian retail borrowers, who have been assured by their government that forint loans are immune to the issues affecting FX debt, would accept such increases must be open to question.

They will certainly have ample precedent for demanding that policymakers shield them from the worst effects of market volatility – and Orban has shown very clearly that, as far as he is concerned, the public gets what the public wants; if that means losses for the banks, so much the worse for them.

With Fidesz settling in for another four-year term after their election victory in April, Hungary’s embattled bankers could find they have another fight on their hands before too long.