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FX Loans: ECB Warns Hungary

Published: October 14, 2013; 07:12 · (Vindobona)

ECB´s governor Mario Draghi warns Hungary. The conversion of foreign currency loans may sharpen the credit crunch.

FX Loans: ECB Warns Hungary / Picture: © SW Umwelttechnik

Due to the dramatic decline of the Hungarian forint against the Swiss franc and the euro in the last years, about 700,000 Hungarian households was unable to repay their foreign currency mortgages. Since 2008, the Hungarian forint lost about 50% against the Swiss franc. In order to support stressed Hungarian home-owners, Hungary´s conservative government wants to shift the burden to banks. Mortgage loans should be re-converted into forint at unfavorable conditions.

The volume of non-performing loans totals about € 4bn, which is 4% of GDP. In total, the size of foreign currency loans comes at € 10bn. In total, about 18% of the loans of private households are classified as non-performing. In summer 2011, the rate stood at 11%.

According to local media reports, the centre-right government wants a 20% reduction at least. In this case, the banking sector would record losses of more than € 3.5bn. Above all, the conversion of foreign currency loans would affect Austrian banks. In Hungary, about 80% of the banking sector is controlled by foreign shareholders. The most important lenders are Austrian RBI and Erste Bank, Italian UniCredit and Intesa Sanpaolo and Belgian KBC. The portfolio of Austrian banks has a size of more than € 20bn.

Hungary´s government announced that the banking sector has to submit suggestions until November. Otherwise, the Hungarian government will find a solution on its own, Prime Minister Orban said.

Now, ECB´s governor Mario Draghi puts pressure on Hungary. Draghi warns Hungary of going it alone. According to Draghi, foreign currency loan conversions would cause a further tightening of lending. First of all, the financial stability of Hungary would be endangered, Draghi says. Moreover, Hungary would fall back into a recession, ECB´s governor warns. According to him, Hungary´s attempt to use foreign currency reserves is highly dangerous.

According to insiders, Hungary may turn in. Ewald Nowotny, governor of Austrian National Bank, indicated that Hungary has already sent first signals to agree on a “common solution”.