There was no step forward rather a small step backward in the new program of the abolishment of foreign currency denominated loans in the last couple of weeks. The government and the Bank Association couldn’t make a agreement after the first negotiation and the government gave a ultimatum to the banks, that they have to solve the problem till 1 November or the government will find the solution and will approve new laws to save the households.
What we can see at the moment that most likely most of the foreign currency denominated may be involved into the new program, which means that roughly EUR11bn loan is involved. It also looks that the government sticks to the concept of the National Bank of Hungary. It would fix the exchange rate of the monthly installments till the redemption of the loan, which is a quite similar solution to the current ongoing program. The main difference that not only the interest payment FX risk but also the FX risk of capital of the loan would be taken by the bank sector. Also it is quite likely that the government won’t participate in the program, which means that the biggest part of the lost may be levied on the bank sector. The short deadline and the hurry may come from the promise the government has given to the voters three years ago, namely they will pretend the households from the foreign currency denominated loans. The election will be held within 8 months, so the government would like to see the results of the program at the beginning of next year the latest.
The open questions are still that what would be the exchange rate of the fixation, will the program set the interest rate of the loans as well, and how it has to be accounted. The most likely scenario is that the same exchange rate will be used as in the previous program: EURCHF at 180, EURHUF at 250. The fixation would mean that banks have two options: heading the FX risk with swaps, which would substantially decrease the interest income or running the FX risks.
It is not very likely that banks can leave open such a huge FX risk, so it can decrease the profitability of the banks. It is also not clear that in case of fixation of exchange rate all the lost has to be accounted front run or it can divide among the years of the duration of the loans. NBH says that only the yearly cost has to be accounted so it can be split between the years.
It seems that the negotiation stopped now, but banks highlighted that the problem of the FC denominated loans cannot be solved in such a short deadline, because it would cause to big loss for the bank sector and the EURHUF would weaken substantially. EURHUF was extremely volatile in the last days. Although is strengthened significantly after the FED decision it looks that it was only temporary. The FC loan program, the loosening fiscal policy and the ongoing rate cut cycle suggests that HUF may weaken in the following months and may EUR/HUF may move above 300 again.