Efforts to weaken Swiss franc may not be enough for Hungary - Bloomberg

With two-thirds of Hungarian mortgages held in francs to escape local interest rates, the Swiss currency’s 14% surge against the forint in the past month threatens to squeeze consumers. The cost of protecting Hungary’s sovereign debt from default rose the most in the past month among 20 emerging-market countries tracked by Bloomberg.

Hungarian Prime Minister Viktor Orbán is relying on faster growth to help reduce the highest debt load among the EU’s eastern members. Nomura International Plc says that a 10% increase in the franc trims growth by 0.9 pp.

The franc has advanced 65% against the forint since the end of 2007, increasing loan repayments and reducing consumer spending capacity.

The cost of protecting against a Hungarian default for five years using credit-default swaps has surged 40.5 basis points in the past month to 374.02 basis points yesterday, the highest in more than six months. A basis point is 0.01 pp. The forint fell 3.3% against the euro.

The benchmark BUX stock index plunged 11.3% in the same period, its worst one-month performance since September 2009. The losses were led by Foldhitel es Jelzalogbank Nyrt., the country’s second-largest mortgage lender and OTP Bank Nyrt., Hungary’s biggest bank, which both fell 22%.

The franc remains the world’s best performer this year after the central bank unexpectedly cut interest rates and said it will increase supplies of the currency to money markets. However, the franc has room to strengthen further as its haven status is “unlikely to dissipate, Lena Komileva, global head of Group-of-10 strategy at Brown Brothers Harriman & Co. in London, told Bloomberg. 

An agreement between Hungary’s government and banks operating in the country to temporarily fix exchange rates on foreign-currency loans to help troubled homeowners is “unlikely to have a material, long-term positive impact on households’ ability to service their debt,” Fitch Ratings said June 3.

Hungary’s local governments are also struggling to service their HUF 600 billion of franc debt and on Aug. 3 asked to delay principal payments on some foreign-currency debt.

Hungary’s credit rating may be downgraded to junk by Moody’s Investors Service and Standard & Poor’s, which both rate it at their lowest investment grade with a negative outlook. Fitch Ratings, which rates it the same level, raised its outlook to stable June 6, citing government plans to cut debt.

State borrowing fell to 77% of gross domestic product in June from 81% last year. Orban’s government, which has declared a “war on debt,” plans to cut spending by as much as $4.6 billion a year by 2013.

Hungary’s central bank, which left its benchmark rate unchanged for a sixth month on July 26, is in a “Catch-22 situation,” said Simon Quijano-Evans, an economist at ING Groep NV in London. Lower interest rates would reduce demand for forint-denominated assets, while rate increases to strengthen the currency would hurt consumers more, he said. "The Swiss franc is seen as a safe haven and there’s nothing an individual central bank can do against that," he added