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Hungary suggests use of FX reserves to bailout foreign-currency debtors; EC to analyse changes in the country’s constitution

Hungary suggests use of FX reserves to bailout foreign-currency debtors; EC to analyse changes in the country’s constitution

13.03.2013 9:20

Hungary's PM (1 1500 CZK, 0,00%) Orban in a speech on Tuesday said the country needs to free itself from foreign-currency debts to regain exchange-rate flexibility. Orban suggested he would like to see the central bank help convert foreign-currency loans into local currency, possibly using foreign-exchange reserves. "The issue of foreign currency loans is fundamentally a question of sovereignty. Never mind that we have our own currency (...) when we cannot use it for our benefit because we are in a foreign currency debt trap," Orbán said. "That is why we need to rescue families from the FX debt trap (…) and lower the ratio of foreign currency debt," he added.

Bottom line: More than half of the total debt held by Hungarian households and SME’s is denominated in foreign currency and HUF weakness causes problems with loan repayments, weighing on spending
and investment. Orban’s idea is that if foreign-currency debts were exchanged into forints this would stimulate domestic demand and make room for forint depreciation against the euro without causing problems to borrowers, thereby helping boost Hungarian exports. Still, the risk is that such nonstandard measures could further increase market fears about government unpredictability making it hard for Hungary to fund itself on international markets. Moreover, such steps might lead to a serious depreciation of the forint, out of a predicted range, driving inflation significantly higher, thus deflating domestic demand. The forint weakened further on Tuesday and traded at around 306/EUR early Wednesday, the weakest level since January 2012, down from around 300/EUR at the start
of the week. Behind the forint weakness were also low inflation figures from February released yesterday - at 2.8% y/y vs. 3.7% y/y in January, and below consensus of 3.1% y/y - suggesting larger interest rate cuts ahead, as well as concern about changes to Hungary’s Constitution introduced on Monday.

The European Commission and the Council of Europe will have to make a legal assessment of the changes in Hungary’s constitution before deciding how to progress, European Commission spokesperson said on Tuesday in Brussels. If necessary, EC spokeswoman said yesterday, "the EC will use its legal instruments to make sure that these laws are changed".

Bottom line: On Monday the Hungarian parliament passed controversial constitutional changes, curbing the power of the Constitutional Court, thereby attracting widespread criticism from home and abroad. In a letter to PM Orbán, EC President Barroso expressed concerns about the amendments compatibility with "the principle of the rule of law". As for now, the EC is likely to take a wait-and-see approach as it is for President Áder to decide whether to veto the law and send it to the Court.

Otherwise, in case the bill gets signed into a law, the EC might decide to take tougher actions against Hungary, like for example suspending aid to Hungary or suspending Hungary's voting rights in EU institutions.

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