August 3, 2011 / 11:16 AM / 8 years ago

UPDATE 4-Hungary local govts seek delay in franc repayments

* Swiss franc gains lift repayments, threaten services

* Some local govts want option of one-year delay in principal payments

* Bonds issued in 2007-08 worth about 600 bln forints

* CDS prices jump, budget risk seen manageable

(Adds detail)

By Gergely Szakacs and Marton Dunai

BUDAPEST, Aug 3 (Reuters) - Hungarian local governments have asked Prime Minister Viktor Orban to help some of them win a one-year moratorium on principal payments for over $3 billion worth of Swiss franc loans, a move analysts said could amount to restructuring.

The Swiss franc’s recent strong gains have brought new trouble for the central European state of 10 million, which has suffered a series of fiscal blowouts in the past and was saved from collapse with an international bailout in 2008.

Unorthodox revenue-side measures will create a one-off budget surplus this year and give Budapest room to manoeuvre, but growth could come under threat if the franc’s strength persists and the government is forced into further fiscal cuts.

Like thousands of households in Hungary, many local governments also borrowed heavily in Swiss francs and have suffered following a 12 percent jump in the franc against the forint since April. For a factbox, see

The Swiss unit has gained 40 percent against the forint since mid-2008, causing monthly payments to skyrocket for borrowers who had taken out loans because Swiss interest rates were much lower than Hungary’s and they believed the forint would strengthen.

The local governments borrowed 600 billion forints of the debt in question in 2007-2008 mainly to co-finance European Union funded development projects under a deal that allowed repayments to begin three years into the loan period.

The chairman of the alliance of local governments said on Wednesday the body was now seeking a one-year delay to the start of the payments for those local governments that request it in the hope the forint can recover.

“The Alliance of Hungarian Local Governments has a proposal, which we will present in a letter to Prime Minister Viktor Orban today,” Gyorgy Gemesi, Chairman of the body told public radio MR1-Kossuth in an interview.

“These are mainly bonds issued with a 20-year tenor and if the start of principal payments is delayed by one year, this will mean a lower burden for (the remaining) 17 years (of the repayment period) than what this 250 Swiss franc level means.”

Gemesi, whose body represents 400 local governments, added that, based on informal talks, banks seemed open to the idea of a one-year delay. The borrowers have been paying the interest on the loans and he made no mention of any change in that.

Gemesi told Reuters later that 300, or about 10 percent, of Hungary’s 3,200 local governments held foreign currency debt, some in euros but mainly in francs. He did not say how many or which ones he expected to ask for any extension.

Orban’s office could not immediately comment. The Hungarian Banking Association could not be reached immediately.

The forint fell 0.9 percent against its main reference currency, the euro, to 272.7 at 1417 GMT. Hungary’s five-year credit default swaps rose 17 basis points to 338, a six-month high but later retreated to 333 .

“Credit markets have not particularly appreciated the... move, which would be tantamount to a restructuring,” said Tim Ash, head of CEEMEA research at RBS in a client note.

“While we don’t see any cross default implications to the sovereign, the move is perhaps weighing on sentiment as this somehow implies a lack of willingness to pay on the part of some public sector entities.”


By the end of 2010, local governments had amassed a total debt stock of 1.46 trillion forints ($7.74 billion), which a PricewaterhouseCoopers report issued in April said could hit 1.83 trillion by the end of the year.

Some 639 billion forints of that was in the form of credit, while 611 billion was in bonds that local governments issued — 85 percent of it in Swiss francs.

Stress tests conducted by the central bank in April showed domestic banks can absorb shocks from sharp gains in the Swiss franc.

The tests were based on a rate of 245 forints per franc at the end of 2011 and 257 for the end of 2012. At 1416 GMT, the forint traded at 249 versus the franc, off record lows at 252 hit early in the day after the Swiss National Bank cut rates in a bid to stem further franc gains.

Tamas Bernath, a director at PwC Hungary told Reuters that Hungary’s OTP Bank and the Hungarian unit of Austrian Raiffeisen were the biggest creditors to the local government sector. Press officials for OTP and Raiffeisen could not immediately comment.

Janos Samu, an analyst at brokerage Concorde said the proposal could buy some time for local governments but in the long run, their funding would again come under strain if the franc remained stuck at such strong levels.

Analysts said some local governments could potentially default, but Hungary’s sovereign status was not at threat.

“This is an added risk for the budget, but it is by no means unmanageable or very dangerous,” said Sandor Jobbagy, an analyst at bank CIB.

He added the government may use funds left over from its renationalisation of $16 billion in private pension assets this year to help the local governments.

Debt held by local governments is already accounted for within state debt therefore any assumption of debt by the government would not increase its debt levels. Most of this borrowing carries no state guarantee.

Gemesi said many local governments had already withdrawn from EU development projects because of funding shortages, but the recent gains in the Swiss franc meant some municipalities could face problems providing even basic services.

“Local governments could get a little room to breathe if we could do this minor modification,” Gemesi said. “This would mean a chance that we do not have to cut back on services.”

Reporting by Gergely Szakacs, Marton Dunai and Sandor Peto; editing by Patrick Graham $1=188.54 Hungarian Forint

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