The desire to deal with the legacy of Hungary’s FX-debt boom is understandable, but there don't seem to be quick fixes to the problem, London-based economists said on Thursday.
Capital Economics, a major City-based financial and investment consultancy, said in a research note released in response to media reports about a potential draft plan being outlined by the government that "the reality is that the various options to deal with Hungary's FX-debt problem simply push losses from one sector of the economy to another".
According to reports, the exchange rates will be set at 160/CHF and 265/EUR. At first sight, this looks like a great deal for households. After all, the HUF is currently trading at 212/CHF, and an exchange rate of 160/CHF is more in line with that seen in 2006-07, when the bulk of the debt was taken out.
But the reality is that "there is no quick fix to Hungary's FX debt problem". For a start, as things stand, the plans will only reduce repayments for a set period. The principal will remain unchanged and non-mortgage FX debt is not covered by the plan.
More importantly, however, the losses on any FX debt will simply be transferred from one part of the economy to another. These losses could be significant - the National Bank thinks that if all FX debt is eventually transferred into local currency the costs could total 7% of GDP.
Given the current focus on sovereign risk, the possibility that the government may pick up the final bill will do little to reduce the perceived vulnerability of Hungary's economy, Capital Economics said.
What's more, a heavy FX debt burden creates other problems beyond simply making the economy vulnerable to swings in the exchange rate. For a start, it creates "perverse policy incentives". While other central banks in the region loosened monetary policy as the global crisis hit, the Hungarian National Bank raised interest rates by 300bps at the peak of the problems, in "a vain attempt" to defend the forint. This hit the one-third of borrowers that had taken out HUF-denominated loans.
More generally, a heavy FX debt burden muddies the monetary transmission mechanism and weakens the control of the central bank as interest rates on the bulk of lending "are now set by another country", Capital Economics said.