Moody’s Investors Service downgraded the ratings of seven Hungarian banks on Tuesday reminding investors that the country’s economic problems will not be solved overnight
The rating agency’s intervention came as something of a surprise, given the sunny tone of financial news wafting from Hungary of late and a sharp rebound in Budapest’s markets.
Hungary’s economy is forecast to expand by around 3 per cent this year, the government has announced an ambitious fiscal reform package and managed to sell $3.75bn worth of bonds last month – more than half this year’s planned foreign issuance.
Meanwhile, Hungarian equities have outperformed almost all other CEE markets since the start of this year (trailing only Russia and Romania) and on Monday the forint hit an 11-month high against the euro.
So either Moody’s is behind the curve, or investors should pause to ponder the following question: can Hungary’s economy really recover while its banks remain in the doldrums?
The challenges facing Hungarian banks are by now well-documented. Around 70 per cent of Hungary’s loan stock is foreign-currency denominated, mostly in Swiss Francs. The cuckoo-clock currency’s 10 per cent appreciation last year against the forint caused problems for Hungarian borrowers as their repayments rose.
Hungary has since banned forex lending but Moody’s notes that the risks in the system will remain for several years “given the long-dated maturity of the existing mortgage portfolios of the banks”.
Hungary’s banks also face policy-linked challenges. A new Ft187bn annual bank levy — set to remain in force until 2012 — caused several banks to report losses last year.
Meanwhile, a government moratorium on evictions — recently extended until July –“contributes to a further weakening of the banks’ debtors payment discipline”, according to Moody’s.
Prime minister Viktor Orban knows he cannot ignore the problem, lest struggling borrowers blame the government for their woes. Still, progress has been slow — a government plan intended to offer relief to borrowers in negative equity has been in the works for almost a year.
However, according to the Tuesday edition of news daily Magyar Hírlap, a final version of the mortgage relief proposals is now complete.
The proposals will target some 115,000 homesowners whose debts are deemed unmanageable – defined as overdue by more than 90 days.
The plan will apparently harness Ft 50-60bn of budget funds to replace forex loans with lower cost loans.
read more Hungary: good news vs banking blues | beyondbrics | News and views on emerging markets from the Financial Times – FT.com.
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