Possible Abolition of Currency Clause: What Distinguishes Croatia and Hungary?

The Hungarian government and the central bank are preparing a support program for bank clients repaying loans with a currency clause. The complete abolition of the currency clause on mortgage loans is also being considered, which is estimated to cause a loss of around 950 billion forints (approximately 4.2 billion dollars) to the banking sector there.

This estimate was presented by OTP Bank CEO Sandor Csanyi for Hungarian ATV. Csanyi estimated that OTP’s loss would be around 300 billion forints, which would still be manageable for the bank, according to Novi list.

The Hungarian government is trying in every way to assist citizens troubled by the currency clause, as they receive their salaries in the domestic currency while repaying loans in foreign currency, thus completely transferring the exchange rate risk to them as clients, which culminated in the case of loans in Swiss francs.

A similar situation exists in Croatia, where the formal currency of payment is the kuna, and household incomes are mostly in kunas, while the majority of loans, about 70 to 80 percent, are denominated in foreign currencies – primarily in euros, and then in CHF. The exchange rate risk has thus been transferred to citizens, or bank clients, while banks face high currency-induced credit risk, as the ‘disruption’ of the exchange rate affects the collectability of loans.

The abolition of the currency clause only on the loan side would open an exchange rate gap in the balance sheets of domestic banks, considering that Croatian citizens mostly save in euros, thus preserving the exchange rate position of banks with euro loans. A risk would open that banks would have to value, regardless of the fact that the kuna is formally stable.

Vice Governor of the Croatian National Bank Vedran Šošić states, referring to data from the work of Peter R. Haiss and Wolfgang Rainer, that about 20 percent of citizens’ deposits in Hungary are in foreign currency, while loans in foreign currency account for about 60 percent.

Therefore, he assumes that Hungarian banks certainly have exchange rate balanced balance sheets, and since they have fewer deposits in foreign currency, they likely ‘cover’ placements in foreign currencies by borrowing in foreign currencies, which is also a cheaper source of capital.

This, Šošić explains, is the situation of so-called carry trade, where banks use cheaper (mostly foreign) sources in foreign currency instead of paying higher interest on domestic savings.

This allows them to offer loans at more competitive interest rates, although with a certain currency risk for the borrower. Therefore, if Hungarian banks were to reduce sources in foreign currencies in such a situation, which is actually supported by the situation of deleveraging, it would then open space for a gradual substitution of loans with a currency clause with loans in the domestic currency, emphasizes Šošić.

However, in our case, banks have very little savings in the domestic currency – almost 80 percent of domestic savings are in euros – so the stability of the system is preserved precisely by the currency clause, says Šošić.

However, it could arise from this that carry trade was also present in our case, but through Swiss francs, with banks allegedly converting domestic or foreign sources in euros into Swiss francs, and then offering somewhat cheaper loans in that currency.