A welcome surprise from Hungary on Wednesday: the central bank is to provide a two-year liquidity facility and buy mortgage bonds in a two-pronged attempt to get the country’s commercial banks lending again.
At least, it was welcome for the markets. Yields on two- to three-year government bonds fell by 30 to 40 basis points and the forint continued its recent recovery. But analysts are divided on whether the package, with its size still under discussion, will do much to get the economy moving.
“It’s an important step forward,” says Michal Dybula of BNP Paribas in Warsaw. “The idea behind it is very laudable.”
He says the measures will help “forintise” the Hungarian banking sector after the disaster of foreign currency lending to home buyers and consumers. The fact that banks who apply for loans will have to undertake not to cut their lending to the corporate sector should encourage investment, he says.
The loans should provide some breathing space for banks. “About 70 per cent of the outstanding mortgage loan portfolio is denominated in Swiss francs. Until that stock is visibly reduced you would like to see some new financing for this sort of activity.”
About €18bn in Swiss franc-denominated loans remain to be paid. The forint gained about 0.5 per cent against the euro on Wednesday, trading at about Ft290.
But as Neil Shearing at Capital Economics in London points out, providing funding in forints will not do much to solve Hungary’s main problem of foreign currency funding.
“If eurozone banks are going to start cutting funding to their Hungarian subsidiaries, it’s not clear how this will help banks to roll over their foreign debt,” he says.
Furthermore, it’s not known whether the central bank will sterilise the new loans by reducing its supply of short-term funds. Hungarian banks rely heavily on two-week paper issued by the central bank to finance long-term liabilities.
Which brings us to another big question mark. Gyula Toth at UniCredit in Vienna says there is no shortage of liquidity among Hungarian banks.
“The banking sector already has 4tr forints (€13.8bn) in two-week treasury bills. It has an enormous amount of excess liquidity. It’s not the case that banks don’t have liquidity and can’t lend – the case is they don’t want to lend.”
He thinks the best that can happen is that banks will take the money and invest it in Hungarian sovereign bonds, earning a spread of about 150 basis points. “It won’t promote lending but at least the banking sector will be in better shape.”
And as Dybula at BNP Paribas says, the measures will do nothing to address a combined public and private sector external financing requirement of about €20bn to €25bn, or a quarter of GDP. But he says that while the stock may be alarming, flows have improved.
“This won’t immediately remove the financing needs but it is positive,” he says. “If the government gets to terms with the IMF and signs a deal, this market will have good potential.”
There’s the rub. Viktor Orbán, prime minister, signalled on Monday that progress could be quick on reaching a deal with the IMF and the European Union on a support package. Toth at UniCredit, among many others, is sceptical about the chances of this moving quickly.
“If they don’t get it, there won’t be any lending in Hungary at all so they have no choice. But they haven’t even [taken the first steps to securing the IMF deal]. This will take a few months rather than a few weeks.”
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