Hungary Retroactive Mortgage FX-Loss reversal (from customer to bank)
OTP Drops Most in 15 Months on Forex Loan Plan: Budapest Mover - Bloomberg
Hungary Focuses on Exchange Rate in Potential Mortgage Overhaul - Bloomberg
Austrian Banks Should Boost Capital Reserves, Central Bank Says - Bloomberg
Basically Hungary is shifting the incidence of loss in the Foreign-Exchange denominated mortgages from customers to banks retroactively. Ergo all mortgages taken out in foreign currency will be in some sense converted to the forint with the loss in purchasing power going to bank capital, instead of rising payment amounts to the borrower in respect to strengthening foreign currency / weakening forint.
Implications of this are very large.
One Hungarian Central Bank (CB) will essentially re-denominate foreign denominated assets into local denominated assets, ergo claims of actual purchasing power increase as foreign banks have to convert mortgages to local currency or allow clients to do so with forex losses shifted to those same banks and in some sense the currency they were denominated prior (Euro).
Second implication that flows out from this is that Hungarian Financial system gains stability at the expense of the Euro system since a lot of actors in that country are Euro Banks (Austrians [Raiffasen, Volksbank etc], Germans, etc) the problem for them is that this creates an imperative for those banks to create a seperate equity reserve in Hungary for these loans that they previously could have carried in their own currency. Ergo their reserves need to be boosted not just because of forex losses they will eat, on both cash flow and asset price shift but also capital needed to be set aside in the juristinction to carry those assets to ameliorate those same capital hits.
Third this dynamic is very sovereign against pan-sovereign financial system and in some sense validates the supremacy of local currency in light of a much stronger actor surrounding it. It creates a sense of possibilities where a minor financial actor (Hungary) forces a major financial actor (ECB) to take a capital hit for activities within it, (Banks lending in Euros and Swiss francs within Hungary). The broader implications are savings rates and capital conservation and formation detach from the ECB and become national in nature.
P.S. What happens if/when foreign "bailout" debt is re-denominated into forint at a fixed exchange rate in the future?
The problem here is thus if they rule that the fx-mortgages are valid they cannot be paid by borrowers if they are not valid the banks eat losses in net present value and time. In first scenario hiding losses and recognizing them is over time while borrowers stop (or already stopped paying) in the second scenario banks loose instantly because losses are essentially forced to be recognized but in some sense the debt becomes cash flowing and gains liquidity. Either way the system is insolvent but at least there will be a resolution and progression to solvency.
OTP Drops Most in 15 Months on Forex Loan Plan: Budapest Mover - Bloomberg
Hungary Focuses on Exchange Rate in Potential Mortgage Overhaul - Bloomberg
Austrian Banks Should Boost Capital Reserves, Central Bank Says - Bloomberg
Basically Hungary is shifting the incidence of loss in the Foreign-Exchange denominated mortgages from customers to banks retroactively. Ergo all mortgages taken out in foreign currency will be in some sense converted to the forint with the loss in purchasing power going to bank capital, instead of rising payment amounts to the borrower in respect to strengthening foreign currency / weakening forint.
Implications of this are very large.
One Hungarian Central Bank (CB) will essentially re-denominate foreign denominated assets into local denominated assets, ergo claims of actual purchasing power increase as foreign banks have to convert mortgages to local currency or allow clients to do so with forex losses shifted to those same banks and in some sense the currency they were denominated prior (Euro).
Second implication that flows out from this is that Hungarian Financial system gains stability at the expense of the Euro system since a lot of actors in that country are Euro Banks (Austrians [Raiffasen, Volksbank etc], Germans, etc) the problem for them is that this creates an imperative for those banks to create a seperate equity reserve in Hungary for these loans that they previously could have carried in their own currency. Ergo their reserves need to be boosted not just because of forex losses they will eat, on both cash flow and asset price shift but also capital needed to be set aside in the juristinction to carry those assets to ameliorate those same capital hits.
Third this dynamic is very sovereign against pan-sovereign financial system and in some sense validates the supremacy of local currency in light of a much stronger actor surrounding it. It creates a sense of possibilities where a minor financial actor (Hungary) forces a major financial actor (ECB) to take a capital hit for activities within it, (Banks lending in Euros and Swiss francs within Hungary). The broader implications are savings rates and capital conservation and formation detach from the ECB and become national in nature.
P.S. What happens if/when foreign "bailout" debt is re-denominated into forint at a fixed exchange rate in the future?
The problem here is thus if they rule that the fx-mortgages are valid they cannot be paid by borrowers if they are not valid the banks eat losses in net present value and time. In first scenario hiding losses and recognizing them is over time while borrowers stop (or already stopped paying) in the second scenario banks loose instantly because losses are essentially forced to be recognized but in some sense the debt becomes cash flowing and gains liquidity. Either way the system is insolvent but at least there will be a resolution and progression to solvency.
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