Moody’s Investors Service in a recent report warned of the danger posed to Hungarian covered bonds of a Sept. 19 law that allows mortgages denominated in foreign currency to be repaid in Hungarian forints. The exchange rate for the switchover represents a discount from the prevailing one.

Since a chunk of cover bonds are denominated in euros, they could get hit.

“The law reduces the value of mortgage loans in cover pools, which in our view is credit negative for covered bonds if issuers do not add further assets to compensate,” Moody’s said.

The move is a faint echo of Argentina, which imposed a pesification of foreign-currency debt in its economy in 2002. Also, two years ago, there were concerns that Russia and other countries in the CIS would engineer a similar move and thereby inflict damage on foreign-currency existing-asset securitizations backed by foreign-currency loans.

Hungary's parliament has reminded the market of the risks posed by having ABS denominated in a currency different from the underlying collateral. Countries under financial or political stress can change the rules of the game.

While Hungary’s no Greece, the country is facing the same prospects of sluggish growth and sagging consumer sentiment as much of the continent.

According to a story in Bloomberg, mortgages denominated in Swiss franc make up a whopping two-thirds of the country’s total. The Hungarian Banking Association has said that the government’s plan to set below-market exchange rates will foist losses on lenders.

Moody’s rates a Hungarian bond program from OTP Jelzalogbank and another from FHB Mortgage Bank. As of June 30, euro-denominated covered bonds accounted for 50% and 35% of the total outstanding, respectively. For both programs, 50% of cover pool assets were denominated in foreign currency, mostly Swiss francs.

For Moody's release (available only to clients), click here.

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