Wednesday, May 14, 2008

Credit agency Fitch warns about risks in foreign currency borrowing.

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Credit agency Fitch warns about risks in foreign currency borrowing. Bank borrowing, which was predominantly denominated in foreign currency, posed a risk for the financial stability, international credit rating agency Fitch declared. It noted that at present the banking system in Hungary was sufficiently capitalized to withstand some external shocks. In addition, conditions for foreign currency borrowing were so far favourable with a relatively strong forint and low external interest rates. On the negative side, however, increased foreign currency exposure could lead to deterioration in banks’ loan quality portfolio in case of a sustained depreciation of the local currency or in case of interest rate hikes on the external markets in a response to the accelerating inflation. Retail clients were mostly at risk of defaults in such circumstances as they had relatively low possibilities to hedge their exposures in comparison to companies. Pressure on banks’ assets could come also from a large downward correction in real estate prices, which could diminish the value of collateral. As of end-2007, around 90% of new retail borrowing was denominated in foreign currency, especially in CHF, representing around 20% of the aggregate loan portfolio of the banking sector.

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Credit agency Fitch warns about risks in foreign currency borrowing.

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