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

(Refiles to show this is UPDATE 3)

* 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 (BestGrowthStock) – 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 (CHFHUF=: ) 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 (NBHI: ) steady in the
past four months at 5.25 percent, after a long period of
continuous easing. [ID:nLDE67M12T]

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 (EURHUF=: ), 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 (CHFHUF=: ) 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 (HUGV5YUSAC=MG: ).

“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 (RIBH.VI: )
— 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. [ID:nLDE6801PX]

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.”

For the bank’s comments click on [ID:nLDE6801F9]

For an analysis on Hungary click [ID:nLDE67U164]

For a factbox on political risks click [ID:nRISKHU]

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

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