If the increased foreign currency demand arising from the conversion of household foreign currency loans into forint appeared in the market, it would give rise to an unintended exchange rate effect, which would entail a risk to financial stability; therefore, for the sake of a smooth phasing out of household foreign currency loans, the MNB is prepared to satisfy banks’ foreign currency need in the amount of EUR 9 billion in order to cover the conversion. The foreign currency need arises from the foreign currency loan portfolio to be converted into forint as reduced by the settlement effect. . The supply of foreign currency will be covered by the MNB’s foreign exchange reserves.
For the sake of a smooth and successful conversion of foreign currency loans, the stakeholders have a vested interest in putting in place a well-coordinated process. In its cooperation with the banks, the MNB finds it necessary to establish a formal framework. In order to facilitate cooperation with the banking sector, the MNB initiates negotiations with the Hungarian Banking Association and with banks providing foreign currency loans about the MNB’s intent to provide the foreign currency required for the conversion of the loans, and at the same time, the banks will pledge to satisfy their foreign currency demand through the MNB’s instruments instead of the market. This arrangement will ensure the predictability of the process, which can significantly reduce any potential effect of the conversion on the exchange rate.
In the interest of satisfying banks’ foreign currency demand to the extent possible, the MNB modifies the conditions of its foreign currency sale instruments. Similar to the settlement phase, the programme consists of two facilities: a spot euro sale transaction conditioned on reducing short-term external debt, and a longer-term foreign currency swap transaction combined with spot euro sale. As opposed to the settlement phase, where the MNB defined a separate limit for recourse to each of the two instruments, the level of central bank reserves is sufficient to define an aggregate limit amount for both instruments for the conversion phase in order to provide foreign currency liquidity as flexibly as possible. In the case of the unconditional instrument, in addition to the existing 2016–2017 maturities the MNB announces the instrument for 2015 maturities as well, which may benefit banks that finance their foreign currency loans through short-term foreign exchange swaps.
In extending the programme, the MNB laid down as a basic principle that the reserve adequacy of the MNB must be continuously maintained. On the one hand, this may help ensure that, in the case of the conditional instrument, banks reduce their short-term external debt by as much as 50 per cent of the foreign currency received, which increases the MNB’s room for manoeuvre. On the other hand, the instrument announced with no explicit conditions will not reduce the level of foreign exchange reserves in the short run; in other words, the utilisation of the reserves will be spread out over a horizon of several years. Consequently, the MNB’s foreign exchange reserves will remain above the level expected by international financial institutions and investors even in the case of maximum recourse to the instruments.
MAGYAR NEMZETI BANK