FX loan early repayment scheme could be ‘serious stability risk’

A scheme by the Hungarian government allowing early repayment of foreign currency-denominated mortgages at a discounted exchange rate, and leaving banks to cover the difference, could pose a "serious stability risk" to the country's financial system, National Bank of Hungary (MNB) deputy governor Julia Király told a conference organized by Thomson Reuters on Thursday.

"The debtors who will be able to participate in the program represent just a smaller part of all clients. At the same time, even this smaller sphere puts pressure on the exchange rate, which worsens financial stability and the position of clients not participating in the program," Király said.

She later told Reuters on the sidelines of the conference that even cancelling this reduced stock of debt would impose substantial losses on the financial system, which would weaken banks' ability to support economic growth by extending credit.

"On the systemic level, we see that the amount of repayment can reach a point where it could pose a serious stability risk," Király said.

She said the capacity of Hungary's banking system to absorb shocks was weaker now than it was in April when the MNB last completed stress tests. New stress tests are expected to be published in October.

Adjusted for the pro rata effect of HUF 528.8bn in revenue the budget is receiving from private pension fund assets transferred to the state's Pension Reform and Debt Reduction Fund and revenue from extraordinary sectorial taxes, as well as excluding the purchase of the MOL stake, the deficit would have reached HUF 875.1bn at the end of August, the ministry said.