Hungarian banks squeezed on all sides

Hungary's banks, many foreign-owned, are finding themselves squeezed from all sides, as a sovereign downgrade to junk status looms, the forint slides and the government takes ever more desperate measures. Non-eurozone but EU member Hungary's public debt pile is currently rated one notch above non-investment level at all three major credit rating agencies. Hungary's Economy Minister Gyorgy Matolcsy said recently a downgrade of the country's sovereign debt was a "real danger." A cut to junk status, the prospect of which has sent the Hungarian currency, the forint, to the lowest levels since March 2009, would make the financing of the sovereign debt even more expensive and difficult. The country is already experiencing difficulty finding investors willing to buy its debt. Last month Hungary's debt management agency failed to sell a stock of one-year treasury bonds because of a lack of offers, while last week it only managed to sell three-quarters of three-month securities on offer. Its currency woes meanwhile are two-fold, with the economy hit not only by the fall in the forint against the euro single currency but also by the sharp rise of the Swiss franc in recent weeks. The latter development is troublesome for banks as they provided many Hungarians mortgages denominated in Swiss francs, and the new-found strength of franc has pushed effective repayment rates for borrowers up to painful levels. Prime Minister Viktor Orban's government has ridden to the rescue of homeowners by allowing them to repay banks at more than 20 percent below market rates. But this has left banks to pick up the difference, with losses for the sector estimated by the central bank at 207 billion forints (670 million euros, $940 million). Compounding this, Orban, who is pulling out all the stops in an attempt to bring Hungary's budget deficit under control, has also saddled banks with a 187-billion forint annual tax. Austria's Erste Bank last quarter took a more than 750-million-euro hit on its Hungarian business, while rival Raiffeisen has said it will have to make "significant" writedowns. Economy Minister Matolcsy indicated last week that from now on, the government would "cooperate" with the banks and would refrain from announcements without prior consultations with the sector. The centre-right Orban, 58, in office -- for the second time -- since May 2010, has also effectively nationalised 11 billion euros in private pension assets. In October 2010 he introduced a "crisis tax" on retail, energy and telecoms firms -- Brussels declared the latter illegal in September -- and has even imposed a "chips tax" on fatty foods. Zsigmond Jarai, an Orban loyalist, former finance minister and central bank governor, said recently Orban's unorthodox economic policies had created investor uncertainty and that its room for manoeuvre was "extremely narrow." The Hungarian National Bank (MNB) for its part warned last week that due to the euro crisis and the increasing number of bad household and corporate loans, Hungarian banks had seen a massive decline in capital reserves. The result has been that banks are less willing to loan money, further hurting the economy, while their many foreign owners, struggling with the eurozone crisis, are less than keen on stumping up fresh capital. Last month Moody's put seven Hungarian banks on review for a possible downgrade. Estimates for growth next year, meanwhile, vary considerably. The Orban government is confidently predicting a 1.5-percent expansion, the central bank 0.6 percent -- and several economists a recession.