VZCZCXRO9243
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHUP #1027/01 3041532
ZNR UUUUU ZZH
R 301532Z OCT 08
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 3509
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BUDAPEST 001027 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/CE, EB/OMA, INR/EC 
TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON HU
SUBJECT: FOREIGN CURRENCY LOANS: HOW HARD WILL BORROWERS BE 
HIT? 
 
REF: BUDAPEST 1006 
 
¶1. (U) Although most hope and expect the recently announced 
IMF assistance package will help strengthen and stabilize 
Hungary's currency, the recent weakening of the forint has 
caused many to consider the impact a weakened currency will 
have on the large number of households holding foreign 
currency-denominated home and automobile loans in Hungary. 
 
HUGE JUMP IN FOREIGN CURRENCY BORROWING 
 
¶2. (U) Recent news reports have focused on the high number of 
foreign currency-denominated loans in both the corporate and 
household sectors in Hungary.  The rapid increase of such 
loans to households in the past five years is particularly 
pronounced - jumping from only five percent of all household 
loans in 2003, to 62 percent during the first half of 2008. 
OTP Bank CEO Sandor Csanyi attributes this to government 
policies which "effectively subsidized" Swiss franc and 
euro-based loans beginning in 2002.  Despite exchange rate 
risks, lower interest rates on Swiss franc and euro loans 
caused Hungarians to increasingly use them to finance home 
and automobile purchases.  The value of foreign currency 
loans to households totaled HUF 3.2 trillion (USD 15.1 
billion) in 2007, and HUF 3.7 trillion (USD 17.3 billion) 
during the first half of 2008. 
 
¶3. (U) As the global financial crisis hits Hungary (reftel), 
the forint has rapidly weakened relative to major currencies, 
including the euro and the Swiss franc.  As the forint 
declines, borrowers must pay increasing amounts to cover the 
same monthly loan bill. 
 
HOW EXPOSED ARE HUNGARIAN HOUSEHOLDS? 
 
¶4. (SBU) The increase in the cost of the foreign currency 
loans to Hungarian borrowers depends on the difference 
between the exchange rate at the time of the origination of 
the loan, and the current exchange rate.  Based on recent 
exchange rates, euro-denominated loans originating during the 
past five years would be on average between 5 and 11 percent 
higher.  Loans originating in July 2008, however, when the 
forint was at its strongest against the euro (231 forints to 
the euro), are now 16 percent more expensive. 
 
¶5. (SBU) The situation is even more pronounced for Swiss 
franc-denominated loans.  Households originating Swiss 
franc-denominated loans during the past five years would find 
their loans between 10 and 17 percent higher based on current 
exchange rates.  However, anyone originating a loan in July 
2008, when the forint was its strongest (143 forints to the 
franc), would now find their loan to be nearly 25 percent 
higher. 
 
¶6. (SBU) The forint has recovered some of its previous value 
in the past several days since the announcement of the IMF 
assistance package.  The currency is still down considerably 
from its mid-summer highs, however, and most analysts still 
expect some volatility as Hungary implements its assistance 
package and as impact of the global financial crisis reveals 
itself in other emerging markets in unexpected ways. 
 
GOVERNMENT ANNOUNCES HELP FOR BORROWERS 
 
¶7. (U) Last week Prime Minister Gyurcsany announced an 
agreement with the Hungarian Banking Association to help 
reduce the impact on households of higher loan repayments 
caused by a weakened forint.  The agreement will give 
borrowers greater flexibility in loan terms, namely allowing 
an increase in the number of payments in order to help limit 
the increase in monthly bills for borrowers.  It also 
provided greater flexibility to convert loans from foreign 
currencies to forints.  National Bank Governor Andras Simor 
ruled out any direct assistance to borrowers, however, noting 
that, "foreign currency debtors should not be saved, since we 
finally have to learn that there is no such thing as a free 
lunch." 
 
COMMENT 
 
¶8. (SBU) To the extent that the IMF agreement helps stabilize 
the forint at previous years' levels, Hungarian foreign 
currency borrowers may be spared from what could have been a 
heavy hit to their pocketbooks.  The events over the last few 
weeks, however, brought to light for many the risks of 
foreign currency loans.  Simor admits privately, however, 
 
BUDAPEST 00001027  002 OF 002 
 
 
that there are "no effective tools" to limit this borrowing, 
and concludes that Hungarians will "have to learn to do the 
right thing simply because it is the right thing." 
Foley