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Originally published Thursday, April 4, 2013 at 6:38 AM

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Hungarian central bank moves to boost economy

In an effort to turn around its shrinking economy, Hungary's central bank said Thursday it would introduce measures to increase lending to businesses and reduce companies' exposure to loans in foreign currencies.

Associated Press

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BUDAPEST, Hungary —

In an effort to turn around its shrinking economy, Hungary's central bank said Thursday it would introduce measures to increase lending to businesses and reduce companies' exposure to loans in foreign currencies.

The new President of the National Bank of Hungary, Gyorgy Matolcsy, said the program called the "Funding for Growth Scheme" was based on similar efforts introduced last year by the Bank of England.

"Hungary needs a turn toward growth," Matolcsy said in his first news conference since his appointment a month ago.

Matolcsy said commercial banks would get up to 250 billion forints ($1.1 billion) in interest-free loans from the central bank which they could offer to small and medium-sized businesses at a maximum interest rate of 2 percent.

An identical amount would be available for companies to convert their loans denominated in foreign currencies to Hungarian forints. The forint's weakness has meant companies with debts in foreign currencies have had to greatly increase their payments.

"Hungarian micro and small- and medium-sized companies get loans, if at all, at interest rates three or four times higher than foreign companies operating in Hungary," Matolcsy said. "We do not consider this acceptable."

The central bank also plans to use 3 billion euros ($3.82 billion) of its foreign currency reserves to help local banks cut their own short-term foreign currency debts, Matolcsy said.

The Hungarian government has made it a priority to get rid of foreign-currency loans, which companies and households took before the global financial crisis to take advantage of lower interest rates in other countries. Rising payments on the loans have left companies and households with less cash to spend, leading to falling domestic demand and causing the economy to contract by 1.7 percent last year.

In 2011, people with mortgages and other loans in foreign currencies were allowed to cancel their debts at exchange rates far below then-current market values, with banks forced to absorb the losses.

Hungary, which is a member of the 27-country European Union, expects its economy to growth by around 0.5 percent this year and Matolcsy downplayed expectations about how much the central bank's new program - to be applied for three months starting in June - would help.

These are "limited steps, so the effects may also be limited," Matolcsy said.

Before taking over at the central bank, Matolcsy was the economy minister of the government led by Prime Minister Viktor Orban and introduced many unconventional measures, including special taxes on certain industrial and service sectors and the nationalization of private pension funds.

Hungary has been able to lower its inflation rate and the state budget deficit to below the European Union threshold of 3 percent, but unemployment remains stubbornly high and total public debt, at around 80 percent of GDP, is the highest in the region.

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