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FX debt deal "a decent compromise", says City

The mortgage debt deal designed to ease debt service costs to distressed FX loan holders is "a decent compromise" with potentially neutral long-term market implications, London-based emerging markets analysts said on Friday.

In a research note released to investors in London, Barclays Capital said that even though the government "seems to have been unafraid to pursue unorthodox policies", it likely realized quickly that the issue of FX-indebted households in Hungary was simply "too big" to be solved by a radical policy response, for example a mass conversion of the FX-denominated loans.

Hence, it adopted an approach that "shows its desire to help, but on a limited scale".

Each of the elements is subject to additional rules, designed to contain the scope and associated risks. As a result, the programme does not have strong long-term market implications. Also, it shifts some of the risks associated with FX debt from the household sector to the government and banking sectors, but the fundamental burden from heavy FX indebtedness has not been removed.

Thus, Hungary's macro performance (growth, current account, fiscal) will still determine whether the programme will lead to pressure on government finances - if guarantees are called - or banks' profits and, ultimately, the exchange rate, Barclays Capital said.

The forint has held out well this week, "in our view helped by investor relief that the ... agreement on legacy FX-linked loans contained no major surprises".

The programme does contain "some" surprises, the main of which being a quota system for foreclosures once the blanket moratorium on these lapses on 1 July.

Importantly, however, the programme has categorically ruled out any debt forgiveness, and this may still act as a deterrent to the moral hazard of Hungarian households which could continue servicing their debt potentially opting not to in the hope that there might be some form of debt forgiveness, Barclays Capital said.

The other surprise is that while the ban on euro-linked mortgages will be lifted, the criteria for household eligibility is high, with borrowers required to have an income in euros at least 15 times the minimum wage to be eligible to apply. "We had anticipated that the re-introduction of these mortgages could have positive effects on the HUF ... However, the sums involved could be modest given the new criteria". This means that "the forint will not benefit as much from the positive flow implications from the programme as we had anticipated".