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Wednesday, December 05, 2007

Swiss Franc Loans Back in Fashion in Hungary?

Portfolio Hungary had a useful piece this week drawing our attention to the fact that the Magyar Memzeti Bank have just published the October edition of its bulletin on Household and non-financial corporate sector interest rates, interbank lending rates (careful PDF). There is a lengthy summary of the state of play with non-forint denominated loans, and in particular a section on Swiss Franc loans in Hungary. As this, and the associated long term translation problem these may represent are a matter, as many readers will know, very dear to my own heart, so I will take the liberty - in order to avoid repeating myself - of quoting them at some length. My own views and analysis can be found here.

According to the Bank, following a moderation in the demand from Hungarian households for Swiss franc-denominated consumer loans, the National Bank of Hungary (NBH) has noted a sharp turnaround in demand in October. The amount of new mortgage loans for consumption leaped by 30% from November to reach an all-time high. It is also a noteworthy that even before the start of the real Christmas season the volume of new CHF-denominated consumer credit jumped by 25% from September, setting yet another historic high.

The amount of new mortgage loans rose to the previously unseen level of HUF 130 bn in October, and this increase is almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purrposes (ie "refis" or liquidity extraction, not to buy houses) became pretty fashionable, rising by 30% month on month to reach the level of HUF 62.5 bn.

Within these new mortgage loans, the ratio of foreign currency loans increased to 92.5%, setting yet another record. What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward in the hope and expectation of rising property values in the future. If this rise does not materialise, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. It also represents a new form of moral hazard for the central bankers, since such borrowing in Swiss Francs is based on the assumption that with so many people doing this the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let it happen.

But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the whole eurozone and beyond. Secondly, and just as importantly as I am arguing, all of this puts the Hungarian central bank in a real double bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates stay high, and Hungarian domestic demand gradually gets strangled, while all the inflation puts a strong brake on export growth.

As far as housing loans go, the amount of new HUF-denominated loans remained at around HUF 10 bn in October and the total loan fee indicator was also largely unchanged (at around 13%). The ratio of CHF-denominated new housing loans was around 68%, not greatly changed from previous months.

The average interest rate and average APR on Swiss franc-denominated consumer loans with floating interest rates or with up to one year initial rate fixation fell to 6.38% and 9.23% respectively. The annualised average interest rate and average APR on Swiss franc denominated housing loans stood at 4.13% and 6.57% respectively.

The difference between the total payment cost of CHF and HUF-denominated mortgage loans has not changed and is still at 6.5 percentage points.

HUF-denominated consumer credit remained more-or-less unchanged at HUF 20 bn, while the interest rate (total) cost rose to a 6-month high of 25.6% even after two rate cuts from the central bank (is the credit crunch tightening reaching Hungary??). This underpins the assumption that Hungarian households that need this kind of access to liquidity are reasonably resistant to interest rate movements in this range, for whatever reason this may be.

The amount of new CHF-denominated consumer credit rose 25% to a historic high of HUF 62.5 bn in October, which was sufficient to send the ratio of CHF loans within total consumer credit to 80%, yet another all-time high.

Look now at the ratio betweem loans and deposits, we find that while household deposits increased by only HUF 150 bn (to around HUF 6,100 bn) over the 12-month period to October, loans went up by nearly HUF 800 bn since December 2006. That is, the entire Hungarian population is steadily indebting itself even to achieve the measly level of economic growth we are seeing.

We thus have to contemplate the possibility (assuming a stable HUF/CHF exchange rate, which is a rather strong assumption in today's conditions, that the amount of outstanding loans could reach and even exceed the amount of deposits by next spring. From a macroeconomic point of view, this is not earth shattering, but it will mean that households' net assets vis-á-vis financial institutions will be negative, and from here it is hard to discern what the implications of this will be, but if growth doesn't pick up strongly (and with the current value of the forint cramping exports given the pace of domestic inflation I don't see how it can) then we are running up against sustainability isssues in every department here.

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