Foreign currency lending: the flow and the stock problem

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Christian Cornelius Gregory
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1 Foreign currency lending: the flow and the stock problem Júlia Király Ádám Banai 2nd NBRM Research Conference "Policy Nexus and the Global Environment: a New Consensus Emerging from the Crisis?" 26 April 213

2 Agenda Accumulating imbalances (the flow problem) Macroeconomic environment in the years of FX lending Households motives: rationality and irrationality Banks motives: profit-seeking and risk-based competition Micro-rationality vs. macro-risks Problem of the accumulated stock (the stock period) 28 present Attempts at a solution The way forward A jegybank elsődleges célja az árstabilitás elérése és fenntartása.

3 Accumulating imbalances (the flow problem)

4 Macro (1): Fiscal alcoholism high budget deficits before the crisis Budget deficit/gdp and gross public debt/gdp ( ) Gross public debt Government deficit 4

5 Gross public debt (in the percentage of GDP) Macro (2): High public indebtedness in regional comparison Public debt as a percentage of per capita GDP and the financial savings of households GR IT 12 GR IT 12 1 PT BE IE 1 BE RO BG LV LT PL HU EE MT SK CZ SI FR UK CY ES DE AT FI SE DK 1 1 GDP per capita (EU =1) NL LV NO SK PL BG IE FI HR CZ LT RO HU EE ES DK SI LU AT SE PT FR DE CY NL UK Net financial wealth of the households(in the percentage of GDP)

6 Macro (3): Permanent demand-side inflationary pressure due to government spending Inflation - actual and target Permanent inflation target CPI Year end inflation target

7 Jan-1 Apr-1 Jul-1 Oct-1 Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan- Apr- Jul- Oct- Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Macro (4): dirty floating and its consequences The forint in the exchange rate band Lower limit Middle of the band Upper limit HUF/EUR 7

8 Jan-2 Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-3 Mar-3 May-3 Jul-3 Sep-3 Nov-3 Jan-4 Mar-4 May-4 Jul-4 Sep-4 Nov-4 Jan- Mar- May- Jul- Sep- Nov- Jan-6 Mar-6 May-6 Jul-6 Sep-6 Nov-6 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Household (1): perceived differentials in rates Interest rates in Hungary, in the euro area and in Switzerland BUBOR 3 month CHF LIBOR 3 month EURIBOR 3 month 8

9 Feb-3 Apr-3 Jun-3 Aug-3 Oct-3 Dec-3 Feb-4 Apr-4 Jun-4 Aug-4 Oct-4 Dec-4 Feb- Apr- Jun- Aug- Oct- Dec- Feb-6 Apr-6 Jun-6 Aug-6 Oct-6 Dec-6 Feb-7 Apr-7 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Household (2): Relatively stable HUF exchange rate vis-àvis the euro and the CHF HUF exchange rate vis-à-vis the CHF and the EUR and the volatility of the latter HUF/CHF HUF/EUR HUF/EUR 1 month volatility (right scale) 9

10 Jan- May- Sep- Jan-1 May-1 Sep-1 Jan-2 May-2 Sep-2 Jan-3 May-3 Sep-3 Jan-4 May-4 Sep-4 Jan- May- Sep- Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Banks (1): accumulating unhedged fx loans Household loan portfolio of the banking system 9 HUF Bn Mortgage - HUF Mortgage - CHF Mortgage - other currency Unsecured loan - HUF Unsecured loan - CHF Unsecured loan - other currency 1

11 Banks (2): consequences of risk based competition Ratio of non-performing household foreign exchange mortgage loans drawn in different periods Number of quarters from contract entering

12 Bulgaria Czech Republic Estonia Poland Latvia Lithuania Hungary Romania Slovakia Euro zone Banks (3): Not too high loan to GDP ratio in regional comparison Household loans as a percentage of GDP in international comparison

13 Dec-97 Apr-98 Aug-98 Dec-98 Apr-99 Aug-99 Dec-99 Apr- Aug- Dec- Apr-1 Aug-1 Dec-1 Apr-2 Aug-2 Dec-2 Apr-3 Aug-3 Dec-3 Apr-4 Aug-4 Dec-4 Apr- Aug- Dec- Apr-6 Aug-6 Dec-6 Apr-7 Aug-7 Dec-7 Apr-8 Aug-8 Banks (4): lack of prudence Loan-to-deposit ratio of the domestic banking system Loan to deposit ratio 13

14 Problem of the accumulated stock (the stock period) 28 present 14

15 21. I. 22. I. 23. I. 24. I. 2. I. 26. I. 27. I. 28. I. 29. I. 21. I I I. Significant net external debt and domestic players run exchange rate risk GDP-proportionate open exchange rate position of individual sectors Households Corporates Public sector Non-residents Net external debt 1

16 Attempts at a solution Both the government and banks launched programs to mitigate borrowers burden: Restructuring by banks ease the terms of payment usually for a period of 1 to 3 years Exchange rate cap - participating debtors may pay their installments at fixed exchange rates Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Number of contracts Loan stock (billion HUF) 18,9 39, 468,3 96, 712,8 812,7 916,2 Proportion to total FX loan portfolio 4,69 8,34 12,8 16,37 19,66 28,4 3,8 Early repayment scheme Debtors could repay their total debt at a preferable exchange rate on a temporary basis 16

17 FX mortgage stock decreased by 23 per cent but the banking system suffered huge losses Fully repayed FX-mortgage loans 1 8 HUF Bn thousand numbers Oct-11 Nov Dec Jan-12 Feb Total amount Number of contracts (right-hand scale) 17

18 What is the way forward? Reallocation of the burden always has negative impacts: Excessive burden on the banking system is immediately reflected in the decline of lending General government unable to assume the burden without limitations With stable and predictable economic policy exchange rate fluctuation will be tolerable To outgrow the problem stable economic growth and income is needed The management of the situation must be based on the consensus of banks, the government and borrowers 18

72/2015-21 April 2015

72/2015-21 April 2015 Provision of deficit and debt data for 2014 - first notification Euro area and EU28 government deficit at 2.4% and 2.9% of GDP respectively Government debt at 91.9% and 86.8% In 2014,