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Greek trouble could stunt Hungary growth

The Hungarian currency hit a record low against the Swiss franc as the latter is once again seen as haven by investors upset by the prolonged Greek crisis.

The waves of the debt crisis in the Eurozone, starting in Greece last year, have reached central and eastern Europe, sending the national currencies in the region to record lows against the Swiss franc.

The franc has risen more than 13% against the euro since early April as investors flocked to the safety of the Swiss currency. The forint has also suffered a 12% drop in value, and the Swiss franc is now traded at around a historic high of HUF 233.

Mortgage misery

The main worry for Hungary, apart from the fact that shaky investor confidence currently common throughout the EU that is always dangerous for small and open economies, is that if the forint stays above 230 versus the franc for a prolonged period, it will further worsen the situation of the already deeply troubled borrowers indebted in Swiss franc.

According to latest data from the Central Bank of Hungary (MNB), 64% of all mortgages and 54% of all corporate loans are in foreign currencies, mainly in Swiss franc. Overdue payments on Swiss franc-based loans affected more than 90,000 homes at the end of last year, about a quarter more than the number of homes that were bought and sold during the year.

Temporary, expensive relief

The Hungarian government has offered temporary relief for troubled borrowers. Under a recently approved legislation, the government fixed the exchange rates on repayments for borrowers that avail of the program for a period of 36 months but no longer than the end of 2014.

The rate for Swiss franc-denominated loans – once the most popular retail lending currency in Hungary – is set at 180 forints to the franc. The rate for euro-denominated loans is set at 250 forints to the euro, and the rate for yen-based loans is set at 200 forints to 100 yen under the law. After the three-year period, the difference has to be repaid with interest.

The increased burden on the indebted population will likely to halt domestic consumption, which already showed a bigger than expected – 0.8% - drop in the first quarter.

Retail borrowers with foreign currency-based mortgages saw their repayments rise as the forint weakened during the crisis, and for the time being, analysts are reluctant to say when the upswing of the Swiss currency will peak.

„It is impossible to say when this trend will take a turn. The rise can only stop once the situation with Greece is settled,” György Barcza, chief economist with K&H Bank told the Budapest Business Journal.

Greek tragedy?

But the Greek crisis is far from over, and decision on the second bail-out package has not been made yet. And many fear that the euro will not survive a second bail-out to the Greeks. Just most recently, Hungarian-born US billionaire and businessman George Soros wrote in his column in the Financial Times that the Greek default may be unavoidable, and unless precautionary measures will not be taken to localize the crisis to the PIGS countries (Portugal, Italy, Greece and Spain), the collapse of the eurozone looks almost inevitable.

A slump in the euro in recent weeks predicated on a division between the ECB which is set against any form of Greek default and Germany, which wants banks to write off some of their investments in any second bail-out.

Trouble in Italy, too

The euro’s uncertainty will remain until the EU decides – an EU summit on the issue is scheduled for the near future - which way to go. But there is the next ticking bomb: Italy, with the second highest state debt in the EU, approximately 120% of its GDP.

But experts say that there is no worry for Italy so far: on the very same day when Fitch Ratings cut Greece's rating to CCC, a rating that implies a substantial risk of default, it gave Italy a vote of confidence, saying the country's debt will remain on a sustainable path as long as the government adheres to its ambitious fiscal targets.

Although Hungary is now far from being in the focus of attention regarding its state debt, analysts say that it should strictly stick to its the debt-lowering plans stated in the Széll Kálmán Plan, as “in a shaky environment, investors’ confidence can easily be hurt,” András Somi, head of retail research at KBC Securities warned.