Hungarians have not become “addicted” to taking out foreign currency denominated loans. The stark fact is that Forint donominated loans are unaffordable and hence potential homeowners have a choice of a Euro or Swiss France loan or not buying a home at all.

I only partly agree with Edward’s analysis. Swiss franc and yen financing may look silly, but we are not talking about extremely big sums here, the yen loans are indeed tiny.

With euro financing the situation is very different. Hungary is one of the most open economies in the world by any measures, and almost all of the export and import is denominated in euros. Although Hungary is not yet a member of the euro-zone, the euro is becoming a shadow currency that is used to fix wages, real estate rentals, etc. Almost all the Hungarian banks are owned by Western European big banks which find it more attractive to loan out their euro funds in Central Europe than in Western Europe (the region has a higher demand for credit and a much higher growth rate).

Hungary has a public finance problem, not a real currency crisis. Even after the current shock on the forint market, banks keep on telling their customers, and increasingly to the public that even though euro denominated loans have an fx risk, they are still cheaper to make than forint loans. There are multiple reasons for this: much of the private sector’s income is euro denominated; the hunger of the public budget crowded out everybody from the forint markets; and eventually Hungary has not given up joining the euro-zone. If you take out a 35 year-long mortgage and 30 years of repayment will be made in euro it is not such a bad idea to denominate the loan in that currency.

I think that the most urgent challenge for the country is to fix the public budget and that is exactly the condition of the IMF-EU-World Bank loan. That will also enable the country to enter the euro-zone, which will eliminate much of the problem Edward recounts here. By the time of entering the euro-zone, the Hungarian economy will be more integrated to it than most older euro-zone members.

Similarly stringent conditions were attached to the IMF loan to Russia. As you may remember:

In 1992 alone, after the first year of IMF ’shock therapy’, real wages fell, due mainly to wage cuts and inflation, by over one third and average personal consumption had fallen by over 40%.

“The policies of the IMF were based on the assumption that a stronger currency automatically leads to a stronger economy. The currency should be strengthened at whatever price, including the decline of production, the impoverishment of the population and even the disappearance of most basic services in the spheres of health care, education and social security.” [Labour Focus on Eastern Europe, No. 61, 1998]

The sharp cuts in spending on education meant that more than 30,000 Russian pre-school facilities were closed between 1991 and 1995.

Knock on effects included accelerating the decline in Russia’s birth-rate. In the town I know quite well, people stopped having children for almost seven years.

The fact that the IMF money never got to Russia and ended up in Switzerland and The Bank of New York only makes the history more tragic.

“One potential lucky break could come if the Swiss decide that the rise in the franc has gone too far and try a coordinated depreciation with other central banks. Would relieve some of the balance sheet pressure in Hungary.”

Look, I don’t think this will work, and I don’t think this is the way to go at all.

In the first place, I think all these people out in eastern europe need to be brought of the fx loan syndrome, and they need to be brought off it now. This means west european banks taking a hit, and we just have to accept that. This silliness shouldn’t have been going on in the first place.

But secondly, you can’t address the issue of the CHF, without also thinking about the Japanese Yen, and the whole issue of “carry”, and why these countries are basically unable to raise interest rates, even during the boom times. Thus we need to go back to Japan, and deflation, and why it exists. Basically, you need to move over to my Japan blog, and read some of what Claus Vistesen has been writing these last three years.

The central banks are already showing their weaknesses too much in this extremely difficult situation, and they wisely backed away last weekend from any attempt to influence JPY, although the Japanese economy is also melting down under the weight of its inability to export.

My only real question at this point is, if Japanese sovereign blows out, who will be doing the Japan “bail out”?