I received two comments in my previous posts on Hungary. I have a 0-comments policy (as opposed to no-comments policy) because maintaining comments is additional responsibility 🙂 and am posting them here. I received few more comments on other posts so apologies for being partial to some comments in over others.

Sergei said:

It is a very one-side story. I am not even sure it connects any dots. The problem in Hungary is CHF mortgages and with the CHF action it is easy to imagine how many of those are seriously underwater. Even worth, some months ago the government legislated a law which allowed a certain type of mortgage borrowers to prepay their CHF mortgages at, I think, 180 CHFHUF while the current rate is almost north of 250. And these transactions have to be executed by Christmas.

CHF mortgages were typically structured as foreign currency clause, i.e. they are denominated in CHF but all payments are made in HUF at spot. While the mortgage market was booming, Hungarian central bank accumulated huge fx reserves coming from CHF which it was buying from banks which financed from their western parents their local CHF mortgage portfolios. Now, as these flows reverse and as government puts deliberate pressure to reverse them, and as central bank in all its stupidly refuses to sell back its fx-reserves, HUF obviously depreciates.

So the current account story might be a correct introduction but the real reason of depreciation, I believe, is much deeper.

BFG said:

Nice blog Ramanan,

The forint was pegged to the euro until Feb 2008, notice the large turn around in the current account when they abandoned the peg, with the hugh depreciation in their currency. They also have a big mortgage problem in which two-thirds of Hungarian mortgages are denominated in Swiss francs. They receive their income in forints and sell it to pay their mortgages in francs reinforcing the upward spiral against the Swiss franc. Even, if they accept the euro which is very unlikely they will still have the franc problem.

Thanks for the comments.

My post was based on just half an hour of research, but anyhow the point I am making is that Hungary’s balance of payments position makes it very difficult for fiscal policy to do the rescue. (Plus unnecessary pressure from Olli Rehn makes it even harder!)

It doesn’t matter if HUF was pegged to the Euro, going forward. Also, the size of the public debt and the net foreign asset positions makes it clear that the Hungarian private sector is heavily in debt and in fact has a net financial liability position. The fact that the mortgages are indexed (or directly denominated in CHF) makes it even worse as far as debt burden of Hungarian households is concerned. Maybe, this calls for a separate post on this.

However, one should be careful if the interest payments are to be included in the balance of payments or not. If the lender is a domestic bank, it is not included. Given the record of the current account deficit of Hungary over so many years, it is difficult to believe that there will be a huge reversal while keeping domestic demand high.

To clarify, my post was on how the balance of payments situation in Hungary is and what implications it has on fiscal policy going forward, and not on factors that led to the implosion of  demand. The fact that mortgages are in CHF (or indexed) makes it even worse!