* Hungary's FX plan very risky, could hit forint, growth
* Foreign banks withdraw profits anyway, "nothing to
* Anti-bank rhetoric could backfire, scare off investment
By Krisztina Than
BUDAPEST, Sept 16 Hungarian Prime Minister
Viktor Orban has got away with a lot over the past year, but his
latest move to cut the country's foreign currency loan burden at
the expense of banks may have gone too far.
Conservative Orban has run a refreshingly unorthodox policy
mix since taking power in May 2010, forcing big business and the
financial sector to pay more of the costs of recovery from the
2008 crisis than elsewhere in Europe.
That should have a cost in sentiment toward Hungary but
investors have repeatedly given the government the benefit of
the doubt -- as long as they seem to be generating growth and
show willing on cutting back a flabby state.
Among other things, the forint and government bond markets
have survived Orban cutting ties with the International Monetary
Fund, nationalising $14 billion in private pension assets, and
slapping big taxes on banks and other firms.
But economists say his latest decision to let households
repay foreign currency loans at preferential rates is the
riskiest yet -- one that may hurt Budapest's credit rating,
undercut growth, push some banks to quit Hungary, and send a
message to other investors that they are unwelcome.
Allowing debtors to repay Swiss franc and euro loans at 180
forint per franc and 250 per euro, well below the current rates
of 237 and 286 forints could prompt big
losses for banks, some of which may need new capital, and stifle
Orban and his Fidesz party would not mind a shake-up of the
Hungarian banking market, even as the euro zone debt crisis
ratchets up pressure against the global financial sector.
"At this moment a significant part of the money which
foreign banks earn from Hungarian people leaves the country, so
we have nothing to lose here," Orban told HirTV on Wednesday.
"Some foreign banks are leaving Hungary right now, while
others are coming in ... I don't know of any country which would
have been left without banks, but I know places where there are
more banks than there should be."
Orban stressed foreign banks were backed by parent firms,
while the Hungarian state would help domestic lenders OTP
and FHB if need be -- confirming his
long-stated view that domestic lenders should be stronger.
"It could be an intended effect (of the repayment measure)
that... there should be a domestic dominance in the Hungarian
banking sector, with some banks exiting and the market share of
OTP and some other domestic banks increasing," said Peter Kreko,
an analyst at think tank Political Capital.
The anti-bank rhetoric goes down well with many voters, even
if the banks have threatened to sue the government in European
courts if it goes through with the plan.
But the policy could also easily backfire if other investors
the government still needs to bring jobs are deterred by a
perception of unpredictable business conditions and an
environment where the state can meddle in loans or other
Hungary's huge stock of foreign currency loans, most of
which were taken out by households prior to the 2008 crisis,
make the country vulnerable due to the exchange rate risk, and
limit the central bank's room of manoeuvre as it constantly
needs to safeguard the forint.
The plan would take out some of Hungary's large FX exposure
if enough households join in, reducing this vulnerability, and
it may increase the central bank's room to cut interest rates in
the longer term and resuscitate forint-denominated lending.
But it would be a gamble with substantial risks.
"Growth-wise, if banks incur large losses, lending would
fall, putting even more pressure on domestic demand, growth, and
the forint and outweigh in our view the positive impact of the
lower debt servicing costs," Goldman Sachs said.
The scheme's impact depends on how many households can
participate using their existing savings, and whether banks will
rush to provide competitive forint loans for refinancing.
Orban says up to 300,000 households may choose to pay off
loans with money in the mattress, but he also admits the number
could be even bigger. Households can apply until Dec. 31 for the
fixed rate repayment.
The total amount of households' foreign currency loans --
mostly in Swiss francs -- was about 5.6 trillion forints ($26.6
billion) at the end of July. If only one-fifth of these are
repaid, banks' losses could run up to hundreds of billions of
forints or over 1 billion euros.
The plan may also threaten the stability of the financial
system by pressuring the forint, as banks would buy foreign
currency to offset the repaid loans.
"We recommend buying EUR/HUF at current levels with a
potential near-term target at 295.00," Unicredit said this week.
The more people join, the weaker the forint could get
against the euro and franc , which, in turn, could
encourage even more borrowers to opt for the early repayment or
punish those who do not.
The banks, on the other hand, face a dilemma. On the one
hand, they may baulk at offering loans in forints, because if
many people use them it would boost their losses stemming from
the fixed rate repayments.
On the other hand, mass repayments will open up forint
lending, and not taking part will cut their market share.
"Although the system as a whole would be better off if the
banks resist providing HUF loans individual banks are better off
by starting to offer these loans as soon as possible," Unicredit
Some analysts said the potential negative impact on growth
and the market risks may even lead to a downgrade of Hungary's
credit rating in a worst-case scenario, even though the country
runs a current account surplus, a trade surplus and a budget
deficit below 3 percent of GDP -- a rare phenomenon in Europe.
"Earlier we expected an upgrade in Hungary's credit rating.
At the moment however due to the increased political and fiscal
risks we believe the chance of a downgrade to junk status has
reappeared," Raiffeisen said in a note earlier this week.
($1 = 210.694 Hungarian Forints)
(Editing by Michael Winfrey and Patrick Graham)