Hungary is considering allowing its citizens with mortgages denominated in a foreign currency -- typically the Swiss Franc -- to pay back their mortgages at an exchange rate that is lower than the current Forint/Franc exchange rate. Hungarian banks would be responsible for picking up the difference between the fixed exchange rate mandated by the government on these mortgages and the Forint/Franc market rate.
This plan has some problems -- in that Hungarian banks may not be able to afford picking up the tab on the exchange rate difference, and that the Swiss National Bank (SNB) may find an influx of capital, even in the form of loan repayments, to strengthen their currency (something the SNB has vowed to prevent) -- but I think it has some key features that may help us understand how the global sovereign debt crisis will be resolved, and what this means for the global economy. Specifically:
By letting those with mortgages pay back their debts denominated in foreign currencies at a lower exchange rate, Hungary is basically making banks pay for part of the loan -- not just the debtor with the mortgage. This type of debt cancellation is exactly what is needed and is the first step to a real solution. Until global debt levels are significantly reduced, there will not be sufficient capital available for investment or consumption. It's that simple.
By proposing a lower exchange rate for foreign-denominated loans, Hungary is pursuing an indirect form of currency appreciation; at least for Hungarians with mortgages denominated in foreign currencies, the Forint will be able to buy them a greater piece of their debt repayment. I still think the Forint has many problems and is not worth owning as a store of value, but a central bank pursuing a stronger currency in some way, while also helping advance the cause of debt cancellation, may be a policy we may see more of as this is at the heart of the solution to the global sovereign debt crisis.
As other central banks realize the need to strengthen their currency, they will naturally turn to where history has always turned to find strength in the midst of public debt crises: gold. This puts us on the trajectory toward some type of re-monetization of gold, which is what sends gold and gold mining shares both much, much higher.
Hungary's proposal here is also unlocking a new era in monetary policy, suggesting a reversal to fixed exchange rates and the end of the floating exchange rate system born when US President Richard Nixon terminated the link between US dollars and gold in 1971. We've already seen the SNB announce that they are basically pegging the Franc to the Euro, and now we are seeing talks of the Forint being pegged in certain situations at a rate different than what the market is pricing the Forint at. I don't think monetary authorities around the world have the trust of their constituents to pull this off, and think various forms of revolution and political re-organization are likely.
So, at the very least, developments in this story will be worth watching. If the right type of debt cancellation deal can be worked out, we may be on our way out of the global debt crisis and ready for the next secular bull market in equities.
Disclosure: I am long GDX.