beyondbrics

Hungarians who borrowed heavily in foreign currency before the crisis have become tireless students of fluctuations in forex markets.

So the forint’s latest slump against the Swiss Franc is ringing alarm bells across the country this morning, as mortgages and other consumer loans become harder to repay.

The forint touched a fresh record low below 226 per Swiss Franc on Wednesday, extending a decline of around 11 per cent over the past month.

Around 70 per cent of all outstanding consumer and business debt in Hungary is denominated in foreign currency, of which the vast majority is in Swiss francs. Most was issued before the crisis when the forint moved in an average range of 160-170 to the franc.

Citigroup says in a note on Wednesday that Hungarian households’ non-performing loans may double in coming months as more borrowers struggle to keep up with debt repayments after the Swiss franc’s rise.

More than 20 percent of household loans are currently 30 to 90 days overdue, suggesting that delinquent household loans may double from 8.1 percent currently if these loans remain outstanding beyond 90 days, according to Citi, reports Bloomberg.

The sort of havoc that renewed forint weakness might cause banks was underlined last month when OTP, Hungary’s biggest lender, unveiled disappointing first-half results including record provisions for potential loan losses.

And a glance at an article in this morning’s Financial Times documenting the franc’s rise against the euro will have offered little comfort to overstretched Hungarian borrowers. Our currency correspondent Peter Garnham writes:

The franc’s move took its gains against the euro this year to more than 15 per cent, with demand for the currency underpinned by Switzerland’s robust economic performance, its current account surplus and traditional safe status at times of market turmoil.

Indeed, haven demand for the Swiss currency is likely to strengthen, analysts say. Few are willing to bet that the Swiss National Bank will again step in to stem the rise in the currency after its expensive foray into the foreign exchange markets this year.

Mansoor Mohi-uddin at UBS says investors regard the Swiss franc as the new Deutschmark. If so, that marks an important change in sentiment.

The forint’s fall is of course not only driven by external events. Selling pressure gaining pace on Tuesday when prime minister Viktor Orban reiterated his opposition to seeking a new IMF loan.

Hungary’s new government has not been inactive on the forex issue. One of its first acts was to ban the issuance of forex mortgages and it is talking about creating a some kind of fund to help indebted households, although this may take time.

But the biggest step that Orban could take to help Hungarian borrowers is one he currently rejects – namely renewing Hungary’s International Monetary Fund agreement. This would doubtless reassure markets and bring down borrowing costs for ordinary Hungarians.

However, with local elections approaching in October, analysts do not appear optimistic about an early policy change. Hungary’s forex borrowers may be in for a bumpy ride.