Hungary banks, gov't to agree on FX debt fix by Xmas, 2012 growth uncertain - Enonomy Ministry

December 9th, 2011 Hungary’s government can reach an agreement with the Banking Association on new opportunities for foreign currency borrowers by Christmas, said Zoltán Cséfalvay, state secretary at the Economy Ministry, on Thursday. He also said the country’s debt-to-GDP ratio could drop to below 77% by the end of this year.

Talking to InfoRádió on Thursday, Cséfalvay said an agreement may be reached soon between the government and the Banking Association on "further opportunities for foreign currency debtors".

The cabinet and lenders are en route to reach find a reassuring solution to the problem of FX debtors. Local households are indebted mostly in foreign currency, primarily in Swiss franc, and the forint’s marked depreciation increased their monthly instalments considerably. In order to ease their predicaments, the cabinet created legislation allowing FX mortgage borrowers to repay their debt in one go at discount rates (EUR/HUF 250, CHF/HUF 180 and JPY/HUF 2), making the banks swallow all related costs. While the lenders are suffering massive losses, they seem willing to come to terms on the future of the assistance programme with the cabinet.

However, there were rumours that the Banking Association may pull out of the talks for lawmakers passed a decree that allows employers to give tax-exempt financial assistance (HUF 7.5 m) to employees wishing to participate in the early repayment scheme, and the banks regard this as counter to an agreement that the cabinet will abstain from unilateral initiatives. Later the Banking Association denied the rumour and the government spokesman also said the negotiations would continue.

Cséfalvay said the banks’ proposals match the cabinet’s ideas, namely that the burdens should be shared by the state, the lenders and the debtors.

"The proposals focus on a long-term management (of the problem), so not just measures that would offer immediate relief but such that could provide a long-term solution."

He noted that by the end of November some 54,000 people have taken up the opportunity to repay their FX debts in full. From this we can estimate that about 100,000 borrowers will take part in the programme by the end of the year (the application deadline is 30 Dec). Cséfalvay believes that a sweeping majority of the repayers did not take out loans to clear their debt but used their savings to do so.

He said 50,000 of them covered the expenses of the early repayment from family and other savings, which means "they will probably not be able to boost demand for a while."

Growth and public debt

Cséfalvay said next year’s economic growth in Hungary is extremely uncertain. He reminded that the Organisation for Economic Co-operation and Development (OECD) forecasts 0.6% GDP contraction for 2012, while the cabinet expects 0.5-1.0% growth.

The state secretary used this argument to explain why the rule on debt reduction in the basic law will come into effect with a delay. "If we rigorously stick to the debt reduction it means money will be withdrawn from the economy in a period when growth is very low," he said.

Cséfalvay also said the government’s cards in the talks with the IMF are very much different than what the previous administration held in 2008. Thanks to the low level of the budget deficit and high foreign currency reserves among others, the general government is in better shape, since state debt is on a declining path.

He believes the European Commission will be right about the country’s debt path. "They expect that by the end of the year Hungary will be able to reduce its debt-to-GDP ratio to 76.7% from above 80% currently."

As regards the forint’s (weaker) exchange rate Cséfalvay said the 2012 budget may need to be amended, considering that it was conceived on the assumption of EUR/HUF 268 (while the forint is currently quoted at around 300 to the euro).

He expects a "relatively small adjustment", saying there are massive reserves worth more than HUF 300 bn, more than 1% of GDP, in the budget. "Plus there’s a HUF 50 billion item for exchange rate differences."

As for the impacts of a weaker forint Economy Minister Matolcsy had disclosed some details earlier.

Cséfalvay emphasised once again that the special sectoral levies on profitable sectors will be abolished as of 1 January 2013.