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Hungary cbanker warns of FX borrowing risks

Rising debt service costs and yen borrowing pose a risk to Hungarian households even though levels of borrowing are not at critical levels, central bank Vice Governor Júlia Király said on Monday.

Király told daily Magyar Nemzet that the debts of households compared with their financial wealth have increased significantly and debt repayments compared with disposable incomes have also increased. She said that at the moment out of Ft 100 of disposable income, Hungarian households pay Ft 13 as repayments which is roughly in line with the European average. “However it is a lot riskier that among low income households repayments and interest payments take away Ft 23 out of each Ft 100,” Király said.

She also said that while rising competition among banks was good for clients as fees and interest rates would decline, banks were taking on increasing risks which may pose a threat to financial stability and may lead to credit defaults. “When you don’t need to make a downpayment, or show an income statement and the aim is that the client should not think only to sign the contract, then there is a problem,” she said.

Hungarians, like people elsewhere in eastern Europe, have borrowed heavily in foreign currencies in the past couple of years, mainly euros and Swiss francs, due to lower interest rates than on forint debt. Households took out €5.9 billion in foreign currency credit in 2007 and almost nothing in forint loans according to a recent analysis by Citigroup analyst Eszter Gargyan. Borrowing in yen is a more recent phenomenon and earlier this year Hungary’s central bank and financial markets watchdog issued a joint warning about the risks of yen borrowing. The central bank’s key concern is the risk stemming from the high volatility of the yen. “The yen’s exchange rate can move suddenly and in a big way: banks have the means to hedge these (movements) but clients don’t have these means,” Király said.

Hungary’s largest bank OTP , the leading provider of yen loans, has said, that there is no special need for concern over them. Analysts have also warned that a further fast rise in household borrowing may pose risks. “In our view, the rising debt ratio and households’ deteriorating financial positions suggest that households’ debt portfolio quality is likely to deteriorate further, which may lead to the tightening of banks’ lending standards,” Citigroup analyst Gargyan said. “In our view, the debt ratio cannot increase at such a pace in the coming years without jeopardising financial stability,” she added. (Reuters)