"Hypothecary law should not be registered in risky foreign currency credit," was the view expressed at an event in 2008 attended by the former Prime Minister, Ferenc Gyurcsány, the former Finance Minister, János Veres, and the president of the central bank, András Simor. "A lot of people just sniggered at my suggestion," says economist Péter Róna. The Orbán government finally announced the ban in August last year but it was already too late. There are now almost one million mortgages based on foreign currency in Hungary and out of this figure half a million households have a Swiss-franc-based mortgage on their homes.

Time bomb

Since the outbreak of the financial crisis in autumn 2008, the average mortgage payment on franc-based credit increased by 40 percent and the monthly mortgage payments rose by 50 to 60 percent. Almost every third homebuyer has experienced difficulties in making repayments. According to recent data, 105 thousand property contracts are more than 90 days late with their payments and just as many are threatened by a similar fate. In two months' time the deadline for the foreclosure moratorium related to mortgages on housing will expire. The property market could potentially be flooded with up to a hundred thousand homes and even more people will end up on the street. The government could prevent this by extending the deadline but perpetually playing for time is inevitably pointless if the problem of foreign currency credit cannot be settled once and for all.    

So far, only partial solutions have been put forward. In addition to prohibiting mortgages based on foreign currency, the ‘debtor-rescue' law has been passed. But the latter only helps clients who are still solvent and not those who have already become insolvent or who soon will be. This year up to 300 thousand families might fail to meet their payment obligations if the rate of the forint does not strengthen considerably against the euro, but more especially against the Swiss franc. The main problem is that the overwhelming proportion of interest rate risk on foreign currency credit is borne by the clients.

Tightening the circle

The Hungarian Financial Supervision Authority (PSZÁF) wishes to help in this matter. In a circular letter PSZÁF called the banks' attention to its desire to have the Swiss-franc-based loans turned into euro-based ones. A degree of misunderstanding arose from this as at the time the circular letter was issued the Swiss franc fell from its peak rate of 220 forints, and the euro was not weak either. This would have resulted in quite an exchange rate loss for anybody trying to change currencies: it would have led to a three million forint loss on an originally ten million forint mortgage, and the monthly payment on the loan would not even have decreased.  

"PSZÁF was not thinking in terms of the public changing to euro-based credit but rather that the banks should have a new product," explained István Binder, the spokesperson for the PSZÁF. The exchange rates could change at any time in such a way that it would be worthwhile for the clients to consider converting their franc-based credit into a euro-based one. (According to Ákos Murányi, the PR manager for Raiffeisen Bank, the issue of mass conversion would be worth bringing up if the exchange rate for the franc was around 170 forints.) Since the majority of people would be willing to convert in the hope of a lower repayment rate than the present one, PSZÁF also gives tips to banks what kind of concessions they should be considering to offer to their clients.    

The authority has proposed interest reductions, conversion at medium foreign currency central rates, and remittals on (credit assessment, credit posting, value assessment or public notary) fees relating contract modification that amount to hundreds of thousands of forints. However, these again only concern clients who pay their mortgages on time and whose credit amounts do not exceed the proportion stipulated in the government decree as compared to the property value serving as collateral. This significantly tightens the circle of those able to take advantage of the above-listed concessions. 

PSZÁF is on the right track in trying to urge the banks to undertake a measure of sacrifice. But this is insufficient, says Péter Róna. He believes that the situation, which fetters every player in the economy, could only be ended by changing the entire foreign currency credit for mortgages into forints. A year ago it might have been possible to get away with this at a cost of 200 billion forints but now it would cost five times as much because since then the foreign currency credit situation has significantly deteriorated.

The ninth hour

Similar figures can be read in the Hungarian Central Bank's study. According to their estimates the final total cost of converting the entire foreign currency credit portfolio for housing mortgages - depending on the exchange and interest rates - would be between 696 and 1,805 billion forints. The state would not be too happy to absorb even part of this expense and the banks even less so, although because of bad payers and foreclosed loans they have already had to set up and account for a significant provision for liabilities and charges. It would be worthwhile their considering if they would not be better off directing their clients towards a more secure foreign currency, and they could then direct the thus freed-up funds to putting credit into the economy.

The establishment of a National Asset Management Agency aimed at helping debtors in the final stage before foreclosure might represent a way out. However, no miracles can be expected from this either: according to the plans that have become known at our going to press through the International Monetary Fund in the first round they would urge the banks to offer those in trouble the opportunity to convert their loans. If the bank failed to do this, it could apply for a state guarantee to cover the costs of loan modifications. 

In the worst-case scenario, the local government would acquire the property and rent it out to the debtor. Only low-income households which had regularly paid their mortgage for at least 12 consecutive months would be entitled to this. According to estimates, the cost of the new system will only be 10-11 billion this year and next year, while in 2013-2014 it will already be 130 billion forints. To conclude, without serious state and bank intervention there will be no rapid way out of the foreign currency credit crunch. The only hope that remains for those affected is that the newly introduced tax reductions that will deprive the state coffers of close to 500 billion forints and the effect of other measures will effectively speed up economic growth. According to the central bank's calculations, economic growth of four percent would decrease the foreign currency loans portfolio proportionate to the GDP from 24 percent to 13 percent over five years.