The 55-year-old florist and her husband borrowed 61,000 Swiss francs — the equivalent of 10 million forints ($47,000, €35,700) in 2006 — to cover two-thirds of the cost of a small apartment in an outer Budapest district.
After four years, a sharp rise in the franc against the forint doubled her payments, from 50,000 ($240, €180) to 100,000 forints ($480, €360) a month.
Worse, the amount she owed in forints had not gone down, but up — nearly 50 percent, to 14.5 million forints.
She lost hope of paying or canceling the debt. And she’s got a lot of company across Eastern Europe.
“I’m stuck in a vicious circle, paying more and more every month and I still owe the bank more than at the beginning,” Papp said in her living room, sitting in front of a folder full of documents and correspondence with the bank. “I’m always depressed and anxious, following the news morning, noon and night to know where the Swiss franc stands.” Foreign currency loans — popular during the mid-2000s in eastern Europe — are now a serious burden on several countries. The loans, in francs, euros or dollars, are holding back attempts to make economies in Hungary, Romania and Ukraine grow — growth that is needed so those governments can dig out from under financial crises that required bailouts by the International Monetary Fund and the European Union.
The problem appears worst in Hungary, where the burden of repaying Swiss franc loans with sharply devalued forints is choking off consumer spending and hurting tax revenue.
Hungarian households’ foreign currency loans totaled 7.3 trillion forints ($35 billion, €26.2 billion) at the end of June, according to the National Bank of Hungary. Nearly 80 percent of that was in Swiss francs, with some loans in euros.
Of the 1.8 million people who took out such loans, 400,000 are behind on their payments, including 100,000 who are behind by three months or more.
The loans are one factor behind the empty shop windows on Vaci utca, Budapest’s main shopping street. Retail sales in Hungary fell every month for more than three years until posting a slight increase in July.
Additionally, debtors are leaving legal jobs for off-the-books work in the gray economy — thus avoiding paying taxes that the government desperately needs. It’s a way to prevent debt collectors from automatically taking part of their salaries as soon as they’ve been deposited.
Papp’s payment struggles began soon after getting loan.
Her family’s company, which made and sold children’s clothing, went bankrupt, undercut by cheap Asian imports.
Papp’s son was unemployed for a long time and has his own problems paying back a car loan, while her husband has been selling fruits and vegetables at a rented store, with mixed results.
Papp also tried for months to reduce her debt by making a lump-sum payment with proceeds from the sale of another apartment — which was also mortgaged by the same bank — but the bank rejected her efforts without giving her, she said, an adequate explanation.
For years, Hungarian banks offered loans — mortgages and personal and car loans — in Swiss francs at much lower interest rates than in Hungarian forints. Forint loans carry higher interest rates because the currency is not as stable as the franc, meaning lenders risk being paid back in money that is worth less than when it was loaned.
The currency risk, instead, was shifted to borrowers — who did not anticipate the violent fluctuations of exchange rates due to the world financial turmoil that began in 2007 over bank losses on US-mortgage backed securities.
“The Swiss franc was offered as the cheapest alternative and people were dissuaded from loans in forints,” Papp said. “Why shouldn’t I trust what the bank clerk tells me?” Without commenting specifically on Papp’s case, OTP Bank’s communications department sent AP a form which people taking out mortgages were made to sign, warning them of the exchange rate risks. The one-page form says the Swiss franc’s exchange rate can fluctuate “in any direction and by any extent.” Consumers typically borrowed when a Swiss franc was worth around 150 forints. On Sept. 8, it briefly rose to over 225 forints, a 50 percent gain. On Monday a franc bought 203.7 forints.
Most of the loans have come from the Hungarian subsidiaries of banks from Austria, Germany and Italy, raising concerns about the impact on banks in those countries.
Other countries in the region have also been affected by foreign currency mortgages.
In Ukraine, the hryvnya fell some 40 percent in wake of the 2008 global downturn and the government banned loans in foreign currencies to individuals last November.
Ukraine’s central bank has been encouraging banks to restructure foreign currency loans into hryvnya whenever possible. But borrowers are reluctant since interest rates in hryvnya throughout the crisis have been 10 to 15 percent points higher than in US dollars, said Yevhen Hrebeniuk, senior analyst of Troika Dialog Ukraine, an investment company in Kiev.
Hungary also suspended loans in foreign currencies from July and the government is working on several measures intended to alleviate the plight of besieged homeowners, including plans to force banks to use a middle exchange rate.
Borrowers would be allowed to automatically extend their loans by five years — losing monthly payments but increasing their total debt because of the extra interest — and banks would have to use an exchange rate more favorable to borrowers. But a proposal to bar banks from pursuing other debtor assets besides the house — which would let borrowers walk away and lose only the equity they have built up — has been dropped.
The proposals are expected to become law this month.
A few days after telling her story, Papp, the struggling florist, was finally able to sell her modest but spotless 52-square-meter (560-square-foot) apartment. She paid back the bank in full — but after four years of hardship and payments she was left with no home and only about $2,500.
She would rather move back to her mother’s countryside home than take on new debts.
“I don’t ever want to have anything to do with another bank loan again,” said Papp. “Especially not in Swiss francs.”
