Hungary local govt debt freeze signals "FX mismatches", says City


News about Hungarian local governments seeking a one-year moratorium in principal debt payments due to significant weakening of HUF against the Swiss franc is "not hugely surprising", but it does remind investors of the FX mismatches in the economy that limit the room to maneuver on interest rate policy, London-based emerging markets analysts said on Thursday.

In a comment released to investors in London, Barclays Capital said that during the credit boom period from 2006 to 2008, the Hungarian local government system built up a substantial unhedged CHF position.

"We do not have the exact currency split but our estimates are that a large portion of it is denominated in CHF ... (and) the appreciation of CHF against the HUF has increased the total indebtedness of the municipal sector by around HUF 200 billion" so far this year alone.

The news of the moratorium itself is "not a big negative" but rather a reminder that Hungary has a balance sheet problem related to large FX mismatches.

In an adverse risk situation with CHF continuing to appreciate generally, CHF denominated loans in Hungary would continue to drag consumer spending and also have a negative impact on municipalities' ability to absorb EU cohesion funds.

The effect also limits the room to maneuver of Hungarian policymakers and their ability to absorb another slowdown as a "hypothetical rate cut" by the MNB could, if it leads to forint depreciation, have a negative impact on the economy through the balance sheet channels even while helping exports, Barclays Capital said.


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