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June 23, 2011

Hungarians struggling with debts in Swiss francs



BUDAPEST, Hungary (AP) — Known for its work with the homeless, flood victims and alcoholics, one of Hungary's biggest charity organizations has its hands full with another group down on its luck — Hungarians burdened with mortgages and other loans taken out in foreign currencies, mainly Swiss francs.

The Hungarian Maltese Charity Service set up its debt counseling program in 2009 and has since assisted more than 700 families.

"We don't treat the problem of high indebtedness as just an economic problem, but as also a mental, emotional and spiritual issue," said program director Gabor Major, relating how unprepared many people are to face mounting financial difficulties.

Despite the charity's efforts and those of several other similar groups, 400,000 people are behind on their payments, including 100,000 who have failed to pay at least three monthly installments.

While 1.8 million Hungarians took on foreign currency loans — mostly in the mid–2000s to take advantage of lower interest rates in countries like Switzerland — a drop in the forint's exchange rate against the Swiss franc has increased their payments often by unbearable amounts.

Exacerbating the exchange rate problems are high unemployment and other difficulties stemming from the global economic crisis, which reached Hungary before many other countries.

At the end of 2008, Hungary became the first member of the European Union to get a bailout from the International Monetary Fund and other lenders, receiving a standby loan of euro20 billion (then $25.1 billion) to avoid a debt default.

"What really increased the difficulties, was the general state of the economy," Major said. "These two together, the economy and the exchange rate explosion, are what's causing the really big problems for many families."

Agnes Kutasi, a 42–year–old saleswoman of health care products, took on a mortgage in Swiss francs of the equivalent of 17 million forints ($91,400) in 2007, when her husband had a well–paying job in Hungary's expanding car industry.

But just a year later, her husband was unemployed and their payments began to rise sharply. A franc was worth around 150 forints in 2007 and is now near all–time highs above 226 forints, an increase of 45 percent.

"Because of the economic situation, as the crisis began, our monthly payments slowly began to rise, but we were able to continue paying them from our salaries," Kutasi said.

But meeting those payments has become increasingly difficult and this month they paid 55 percent more than at the start, now 187,000 forints ($1,010).

With Hungarian families spending more and more of their income on paying back debts, they have less and less to spend on other things. As a result domestic consumption is stagnant and the growth of Hungary's struggling economy is now driven almost fully by its exports.

Last month, Prime Minister Viktor Orban's government announced a series of measures, some agreed on with Hungary's Bank Association, meant to offer temporary relief to mortgage holders while gradually lifting a moratorium on evictions from July 2.

Under the plan, the Swiss franc's exchange rate will be fixed at 180 forints for mortgage payments until the end of 2014, with the difference between the real and fixed exchange rates accruing on a separate account, which will have to be settled from 2015.

While the voluntary scheme could result in lower mortgage payments during the next few years — especially if the Swiss franc remains well above 180 forints — borrowers payments' could rise again sharply from 2015, once the fixed exchange rate is eliminated.

The National Bank of Hungary warned about those risks shortly after the government's plan was announced.

"Fixing the exchange rate for a temporary period may create false illusion ... for debtors that they can get rid of the exchange rate risk," the central bank said. "The risk is that many debtors will spend their additional disposable income gained by the fixed exchange rate to consume rather than save and will be unprepared to pay possibly higher monthly installments after the grace period expires."

Unlike thousands of others, the Kutasis don't yet face the threat of losing their home, but they've had to tighten their belts and can no longer afford their two kids' college education.

Facing 21 more years of mortgage payments, Kutasi's view of the future is more than grim: "It is hopeless."



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