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After Hungary's Swiss franc mortgage manoeuvre, a nod to Orbanomics
January 23, 2015 / 2:50 PM / 3 years ago

After Hungary's Swiss franc mortgage manoeuvre, a nod to Orbanomics

LONDON/BUDAPEST, Jan 23 (Reuters) - Hungarian Prime Minister Viktor Orban has long irritated European Union partners with economic policies that have burned foreign banks operating in Hungary. They may find his triumph in this month’s Swiss franc episode a bitter one.

Unorthodox measures - dubbed Orbanomics - have included a 2011 repayment scheme to relieve Hungarian families of costly Swiss franc-denominated mortgages at the expense of the banks, most of which were foreign owned.

Such policies were contributing factors in the banks, including Austria’s Raiffeisen and Erste and a unit of Italy’s Intesa Sanpaolo, taking write-downs on their Hungarian operations.

Speaking to investors last summer in London, Orban’s central bank governor Gyorgy Matolcsy was eloquent on the need to tear up policy rule books - as his country was doing.

But if Matolcsy’s comments were met with scepticism last year, many are grudgingly admitting this week that he and Orban - also known for one of the highest bank levies in Europe, financial transaction taxes and a $12 billion pension fund grab - may have done something right.

“(The FX mortgage conversion) was one of many negative and controversial decisions from Budapest and many people still find their decision-making controversial. But you have to acknowledge that so far it has worked,” said Marcus Svedberg, chief economist at asset manager East Capital.

As governments, banks and families across central Europe reel from the Swiss franc’s 20 percent surge against their currencies, those measures have allowed Hungary to escape the worst. And Poland, Croatia and Romania all are now mulling Hungary-style steps to cope with the rising franc.

Sure, there was an element of luck in Hungary’s move - it ordered banks to convert loans into forints, fixed the exchange rate and only two months ago finalised terms of the conversion by providing euros from central bank reserves to help lenders.

“Because of what they’ve done, getting households to repay Swiss franc loans early, providing them with a hedging mechanism the adjustment cost has been priced in and hedged,” said Koon Chow, a strategist at Swiss private bank UBP.

“It’s been a vindication of Hungary’s intent,” he said.

Orban’s triumph may be difficult for some to accept, given his record of riling the European Union with constitutional changes that have centralised power and are, according to some, eroding democracy as well as media and judicial independence.

In office since 2010 - and winning a two-thirds majority in 2014 elections - Orban has remained defiant, in one interview describing government checks and balances as “a U.S. invention”.

He denies his government is eroding democracy.

“Even Hungarians can have luck for once,” Economy Minister Mihaly Varga told public television this week. He said that the government’s well-timed measures have saved hundreds of billions of forints for foreign currency borrowers.

Now Hungarian markets may benefit. Erste Bank advises buying shares in OTP Bank, which has 3 percent of its loan book in francs compared with 16 percent at Poland’s biggest lender PKO.

Polish bank shares have fallen 8-12 percent since last Wednesday - just before the Swiss move - contrasting with 5 percent gains in OTP.

Hungary also may have more leeway to cut interest rates than some neighbours, whose foreign loans exposure may deter them from weakening their currencies too much. Finally, despite a junk credit rating, Hungarian bond yields and debt insurance costs have fallen steadily and are lower than many investment grade emerging peers, these graphics show:

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ECONOMY

The 51-year old Orban’s vaunted achievements since taking office in 2010 go beyond the mortgage issue.

After years of bumping along at near-zero growth, Hungary’s economy was one of Europe’s fastest-growing in 2014. With a current account surplus of almost 4 percent of annual output, Hungary stands out - Poland probably had a 3.3 percent deficit last year; Turkey and South Africa fared even worse.

And in 2013, Budapest exited the EU’s excessive-deficit procedure for budget offenders - for the first time since joining the bloc in 2004.

“It’s turned out better than initial expectations. They managed to reduce the budget deficit without imposing austerity and hiking taxes across the board,” said Zsolt Papp, client portfolio manager at JPMorgan Asset Management.

“Growth, current account, by the measures that investors look at, Hungary is doing okay, compared to where it was before, compared to neighbours and the wider emerging markets universe.”

The bank raids may also get more support in the West than a few years ago, as a series of scandals in Europe and the United States has led to calls for more taxation and scrutiny of banks.

Investors, and more so banks - the main victims of Orbanomics - are reluctant to endorse Hungarian policies.

For instance, Greg Saichin, head of emerging debt at Allianz Global Investors acknowledges Hungary’s strong recovery but attributes it to “harsh policies that singled out banks and services to bear an unequal load of the tax burden”.

It may also have stored up problems for the future.

Annual financial sector taxes of over $500 million have boosted budget revenues but are punitive for banks which are also now paying 3 billion euros to customers after courts deemed past lending practices unfair. This could compromise their appetite to lend in future, analysts warn. The conversion of foreign currency mortgages, however, has not brought additional costs for banks.

“I don’t think all this is good for long-term sustainable growth, it’s problematic to have too much top-down policy making and it’s undermining the checks and balances,” Swedberg of East Capital said.

“But we’ve all been saying this for so long and they don’t care. In any case the Hungarians are happy today.” (Additional reporting by Chris Vellacott in London, Krizstina Than in Budapest and Jakub Iglewski in Warsaw; editing by Janet McBride; graphics by Vincent Flasseur)

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