VZCZCXRO5013
RR RUEHIK
DE RUEHUP #0883/01 3480821
ZNR UUUUU ZZH
R 140821Z DEC 09
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 4746
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BUDAPEST 000883 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/CE JMOORE, EB/OMA, INR/EC, TREASURY FOR 
ERIC MEYER, JEFF BAKER, LARRY NORTON; COMMERCE FOR SSAVICH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL HU
SUBJECT: HUNGARIAN BANKING SYSTEM: LIQUIDITY YES, LOANS NO 
 
REF: A. BUDAPEST 858 
     ¶B. BUDAPEST 871 
 
BUDAPEST 00000883  001.2 OF 002 
 
 
¶1. (SBU) Summary.  Although the Hungarian banking system is 
awash in forint liquidity, retail lending levels remain low. 
High borrowing costs and the difficult economic climate are 
impacting consumer and small business demand for loans, while 
deteriorating customer credit scores and high risk aversion 
negatively affects banks' willingness to lend.  As a result, 
commercial banks are increasingly putting their money in the 
central bank in the form of two-week bonds, the value of 
which has nearly quadrupled since the beginning of the year. 
Although there have been attempts to make credit more 
available - in particular to small businesses - the lack of 
growth in lending is contributing to the continued stagnation 
in domestic consumption levels.  Ideas to make loans more 
affordable and to increase banks willingness to lend are 
being proposed, but may fall to the next government to 
implement.  End Summary. 
 
LIQUIDITY RETURNS, LENDING DOES NOT 
 
¶2. (U) A lack of liquidity is no longer a serious problem in 
Hungary's banking system.  According to the Hungarian 
National Bank's (MNB) November Financial Stability Report, 
liquidity in the banking sector has improved significantly 
over the past six months.  In addition to lower financing 
risks, the MNB notes that forint liquidity has been boosted 
by central bank measures (lower reserve requirements, wider 
range of eligible collaterals, new credit structures) and by 
refinancing of the maturing forint-denominated bonds of the 
government by the IMF loan. 
 
¶3. (U) Despite the significant improvement in the liquidity 
situation, borrowing in Hungary continues to decline, 
primarily due to high borrowing costs and an unwillingness of 
banks to lend.  According to MNB data, in October, households 
repaid approximately USD 70 million more in loans than had 
been taken out, and housing loans were at their lowest levels 
in nearly five years.  Adam Farkas, head of Hungary's 
Financial Supervisory Authority (PSZAF) noted on December 4 
that despite "abundant forint liquidity," high forint 
interest rates are a key factor discouraging households from 
taking loans.  Consumer and business demand for loans is also 
negatively impacted by Hungary's deep recession and growing 
unemployment rate. 
 
¶4. (U) There are supply side factors as well, including a 
decline in banks' willingness to lend, as banks seek to 
improve loan portfolio quality in the face of deteriorating 
customer creditworthiness caused by the current economic 
environment.  A November survey of senior loan officers on 
bank lending practices reveals that most banks in Hungary 
continue to report a decline in credit availability 
(willingness to lend) during the third quarter of 2009.  MNB 
officials explain that this year "the unfavorable 
macroeconomic and money market environment raised credit risk 
significantly, while banks' risk tolerance weakened 
significantly."  As a result, "banks are not circulating the 
ample liquidity to the real sector." 
 
MONEY IN THE (NATIONAL) BANK 
 
¶5. (U) Instead of increasing household or corporate lending, 
banks are increasingly putting their money in the central 
bank through the purchase of two-week MNB bonds.  According 
to MNB data, by the middle of 2009, banks' overnight deposits 
and two-week MNB bill holdings reached nearly 15 percent of 
the domestic banking sector's balance sheet total.  The value 
of two-week MNB bills alone purchased by banks increased from 
approximately USD 5.5 billion in January 2009, to nearly USD 
19 billion today. 
 
DOMESTIC CONSUMPTION DOWN 
 
¶6. (U) Given existing fiscal and monetary policy constraints 
(ref A), many observers see lending growth as one of the few 
avenues available to Hungary to help increase domestic 
consumption and investment, thereby helping improve Hungary's 
growth outlook.  In its most recent financial stability 
report, the MNB notes that "due to the strong interaction 
between the banking sector and the macroeconomy, persistently 
tight credit market conditions imply a significant risk to 
economic growth."  Analysts do not expect the situation to 
turn around anytime soon.  Erste Bank macroeconomist Nyeste 
Orsolya points out that while there has been an improvement 
in the performance of exports, "the deeply negative domestic 
 
BUDAPEST 00000883  002.2 OF 002 
 
 
consumption is unlikely to show any spectacular recovery in 
the near term." 
 
FINANCING FOR SMALL BUSINESSES 
 
¶7. (U) The government has taken some measures during the past 
year to provide small and medium-sized enterprises (SMEs) 
with financing support, including increasing micro loans and 
doubling the SME guarantee facility.  According to the OECD, 
however, the overwhelming majority of SMEs are not "bankable" 
in Hungary, since "strict collateral requirements for loans, 
tiny supplies of venture capital, high real interest rates, 
and banks' insufficient expertise in assessing small and 
micro firms' credit risk combine to constitute a powerful web 
of financial constraints." 
 
¶8. (U) One popular program that is helping to provide 
financing for Hungarian small businesses is the Szechenyi 
Card (ref B).  Under the program, SMEs can apply for a 
revolving line of credit ranging from USD 6,000 to USD 
150,000 at a lower, government-subsidized interest rate.  To 
encourage banks to grant credit, participating banks receive 
a state guarantee for up to 80 percent of the value of the 
loan. 
 
¶9. (U) CEO Laszlo Krisan of KA-VOSZ (the firm implementing 
the Szechenyi Card Program) estimated that 125,000 Hungarian 
SMEs (approximately 20 percent of SMEs) are currently 
extended USD 3.5 billion worth of credit under the program. 
KA-VOSZ Development Director Zoltan Szep notes that this year 
they have seen a 10 percent increase in companies applying to 
join the program above projected growth levels - a figure 
they attribute to Hungary's deep recession and SMEs lack of 
access to alternate sources of credit. 
 
COMMENT: TURNING LIQUIDITY INTO LOANS 
 
¶10. (SBU) There is broad recognition of the need for 
affordable financing for SMEs and consumers in order to help 
revive domestic demand in the face of Hungary's deep 
recession and necessary conservative fiscal policies.  Former 
MNB Governor Gyorgy Suranyi has proposed one such plan in 
which the Hungarian Development Bank would offer subsidized 
one-year bonds to commercial banks that would in turn offer 
longer term loans to SMEs and individuals at more competitive 
rates.  This and other programs, however, would take time to 
develop and implement.  With Parliament adjourning on 
December 14 and national elections just over the horizon, the 
task of reviving lending will likely fall to the next 
government. 
LEVINE