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Swiss Franc Loans: What went wrong?

Hungarian Prime Minister Viktor Orban made a bold move in January by forcefully removing Swiss franc loan options from the Hungarian Central Bank portfolio. This incredible move potentially saved debtors billions in loan fees and narrowly avoided a disastrous fiscal year. Just what caused him to do so?, and what happened to the once favoured Swiss Franc loan?

swissfranc1Viktor Orban. 2014

Swiss franc loans were a popular choice between 2000 and 2010 as a way to avoid higher interest rates on Hungarian bank loans. Interest rates in Switzerland were much lower than domestic rates and this created an attractive capital return for investors as well as a vast saving on mortgage repayments for private home-owners. While many Hungarians used these loans to finance their homes and purchase auto-mobiles because it was a good investment at the time, many failed to predict the longer term implications the Swiss franc loans would facilitate.

As the Swiss Franc became stronger against the Hungarian Forint, it became less attractive to borrowers and less savings in interest rates on loan and mortgage repayments were possible. This encouraged them to adopt Hungarian interest rates and bring about fiscal growth at a crucial time when under threat from the buoyancy of the Euro currency.

In the third quarter of 2011, the Swiss bank intervened the flagrant abuse of its forex and imposed a rate of 1.05 against the Euro. This resulted in cauterising the risk to Swiss citizens and harm to the Swiss economy; however, this only shifted the enormous risk onto foreign investors and borrowers who saw a 50% increase on loan repayments. Switzerland has a heavy export dependency so it relies exclusively on foreign investors. For this reason, a stronger Franc actually hurts the Swiss economy which is why a ceiling was created in 2011 to limit the forex rate. The boomerang effect of course fluctuated over a decade when banks began buying Euro currency against the Swiss franc, and this brought about the sudden panic for borrowers who faced a hefty increase to APR.

swissfranc2

The current situation between the Swiss Franc (CHF) and Hungarian Forint (HUF). The Forint is at a loss against the Franc as it strengthened 4.3 percent soaring up to 320 Forint against the Franc.

Read the full article at BudapestInc.com

 

 

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This entry was posted on March 10, 2016 by in Uncategorized.

Logo image by Lora Rajah under creative commons license.

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