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UPDATE 3-Hungary may need IMF if markets sour: central bank

Published 09/01/2010, 12:26 PM
CHF/HUF
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* April stress scenario almost realised due to Swiss/forint

* Banks may need fresh capital, but should be available

* May need to hike rates on CPI/if risk assessment worsens

* Forint firms on improved global mood in choppy market

(Adds Raiffeisen International comments)

By Krisztina Than

BUDAPEST, Sept 1 (Reuters) - Hungary may need the support of an IMF and European Union safety net if global investor sentiment turns negative, and such a scenario is "not at all unlikely", the central bank (NBH) said on Wednesday.

In an emailed response to Reuters' questions, spokesman Andras Simon also warned that the firming of the Swiss franc against the forint posed risks to Hungary's growth and could force some banks to seek additional capital.

Many Hungarian households have Swiss franc mortgages and are at risk of crippling rises in their loan payments.

"It is important to see that the recovery of the global economy is still fragile and as a result international investor sentiment shows strong fluctuation," the central bank said.

"In case of a negative -- and not at all unlikely -- shift in investor sentiment Hungary may need the financial safety net provided by the International Monetary Fund and the European Union," it said.

The bank reiterated its earlier stance on interest rates, saying: "If inflation risks prevail, or the country's risk assessment deteriorates in a lasting way, raising the base rate may become necessary."

The bank has kept its benchmark rate steady in the past four months at 5.25 percent, after a long period of continuous easing.

Hungary's existing 20 billion euro ($26 billion) IMF deal saved it from financial meltdown in 2008 but talks on a review collapsed in July and the government has said it will not seek a new deal with the IMF when the current one runs out in October.

Financial markets have been relatively forgiving since then, but a fresh rise in risk aversion has driven the Swiss franc to record highs against the euro and put the forint and government bonds under pressure this week.

"The NBH are rightly highlighting several areas where market expectations have become divorced from reality, for instance the downside risks to gross domestic product (GDP) during the second half from the Swiss franc/forint rate, the funding vulnerability of Hungary and so the need for a supranational backstop," said Peter Attard Montalto at Nomura.

Central bank "rates may well need to be raised soon to maintain risk premia and tackle inflation," he added.

Hungary's forint, which has underperformed other currencies in eastern Europe this year, hovered around 285 to the euro at 1500 GMT, firming from opening levels of 286.45 as sentiment on global markets improved and the euro firmed against the dollar.

But local markets remain choppy due to prevailing uncertainty over the Hungarian government's economic and fiscal plans. Most analysts say there will be more clarity on the 2011 budget only after October 3 municipal elections.

STRESS

The forint has weakened to record levels as far as 222 per franc, down 18 percent so far this year. It recovered to around 218 on Wednesday -- still a painful level for Hungarian borrowers.

The central bank said its bank stress scenario -- published in April and based on a forint/franc rate of 215 -- had almost become a reality.

The scenario also assumed credit default swap (CDS) levels 200 basis points higher than in April. In April the cost of insuring Hungary's debt was around 180 basis points while it is around 360 now.

"We are already almost on this adverse path. As a result based on our calculations, some banks may face capital needs, but still only to a limited extent (up to 40 to 50 billion forints or 140 to 180 million euros)," the bank said.

It said it was confident that the owners of banks operating in Hungary would guarantee the extra capital needed, adding the liquidity position of banks was improving and the exchange rate weakening was not causing financing problems.

"The capital adequacy and as a consequence the shock absorption capacity of banks with a Hungarian ownership background is currently high," the bank added.

A spokesman of Austria's Raiffeisen International -- one of the biggest lenders in Hungary -- said after the NBH comments that its Hungarian subsidiary was well-capitalised and that it remained committed to Hungary.

The central bank said forint weakness has delayed the peak in non-performing loan ratios (NPL) which it had projected for this year, and "is causing higher than expected loan losses in the financial sector which reduces banks' capital adequacy."

(Reporting by Krisztina Than, additional reporting by Sandor Peto and Sylvia Westall in Vienna; Editing by Patrick Graham/Ruth Pitchford)

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