Hungary's Weak Currency Creates Policy Dilemma

„Hungary's risks include a high exposure to foreign-currency mortgages among its citizens, government policies perceived to be anti-bank, proximity to the euro zone that leaves it at risk of debt-crisis contagion, and the threat of a sovereign ratings downgrade. Foreign-currency debt makes up about 60% of total private-sector lending in Hungary, meaning that every tick lower in the forint adds to the overall debt burden in the country and making a rebound in domestic consumption difficult.

Many local households that took on mortgages denominated in Swiss francs before 2008 have been struggling with repayments after capital flight from the euro zone boosted the Swiss currency, which functions as a safe haven in times of stress.

Hungary's government tried to reduce those debt levels by setting up a mortgage repayment program, introduced Sept. 29, through which holders of Swiss franc-based mortgages can repay their loans at a discounted fixed rate, but the plan appears to have backfired. With banks bearing the losses from this policy, both Fitch Ratings and Moody's Investors Service warned that the program could put the banking sector under pressure. This in turn raised concerns that a sovereign ratings downgrade could be next.”