Hungary has been offering forint loans to its citizens to help them repay Swiss Franc denominated mortgages. Hungarian prime minister Viktor Orbán has said as many as 300,000 might opt for the discount repayment scheme.The European Central Bank (ECB) has warned that the government’s scheme is likely to weaken the Hungarian forint, and cause a slowdown in the economy because of a decline in lending activity, according to Robert Hodgson of The Budapest Times.
The ECB is clearly not pleased at Orban’s decision.
[The ECB would]”appreciate the Ministry for National Economy giving due consideration to honouring its obligation to consult the ECB in the future.”
Hungarians and others in Eastern Europe chose Swiss franc mortgages in the years leading up to the financial crisis because of their low interest rates. At the time, a Swiss franc could get 160 Hungarian forints, now its closer to 252.
Fearing defaults and the country’s exposure to foreign-currency debt, the government introduced a scheme that allows borrowers who make payments on time, the opportunity to pay a fixed rate of 180 Hungarian forint to a Swiss Franc. The catch? They only have till the end of the year to participate in the scheme, have to pay about 10% in interest and only have 60 days from the date of the application to borrow the funds or raise the money.
Earlier this year we reported that bankers were furious at Orban because the scheme would force banks to assume losses stemming from the difference between the artificial exchange rate of 180 Hungarian forint to a Swiss franc and the market rate. Austrian banks like UniCredit Bank Austria, Erste Group Bank and Raiffeisen Bank International are some lenders likely to take a hit.
With net state debt at an all time high of €67.96 billion and Hungary’s sovereign debt on the verge of being downgraded to “junk” status, exposure to Hungary was driving up Austrian bond yields last week.
Financial regulator PSZAF said that Hungarian borrowers repaid 29,427 foreign-currency mortgages in the first month of a government scheme. Borrowers paid a little over 130 billion Hungarian forint or €414.57 million.