Hungary Cabinet Debates Forex Loan Aid After Banks Plunge

Hungary’s cabinet is meeting to discuss proposals to help foreign-currency mortgage holders after bank stocks plunged on concern that lenders will be forced to take losses.

The Justice Ministry is “seeking legal solutions” to the issue, it said in an e-mail yesterday, confirming that ministers will debate the topic today. Prime Minister Viktor Orban will consider “at least” six proposals and may not make a decision today, Budapest-based newspaper Nepszabadsag reported today, citing unidentified government officials.

Orban, who faces elections next year, wants to help borrowers of more than $16 billion in mostly Swiss franc-denominated mortgages whose payments soared as the forint dropped during the global credit crisis. Hungary is looking at the possibility of modifying the conditions of foreign-currency loans, probably focusing on exchange-rate changes, the Justice Ministry said July 18 by e-mail. Banks may have to bear part or all of the costs, Magyar Nemzet newspaper said the same day.

“The stakes are extremely high for Hungarian banks as the measures may cause hundreds of billions of forint in losses for them,” KBC Groep NV (KBC)’s Equitas broker unit in Budapest said in an e-mail today.

OTP Bank Nyrt., Hungary’s largest lender plunged 17 percent in the three days through July 19 as Chairman and Chief Executive Officer Sandor Csanyi sold all but 10,000 of his personal holding of the stock last week. It gained 0.5 percent to 4,266 forint by 11:04 a.m. in Budapest. The forint weakened 0.3 percent to 296.81 per euro.

2011 Plan

OTP dropped 36 percent and the forint weakened 12 percent in 2011, when the government forced banks to take losses by allowing clients to repay foreign-currency loans early at below-market rates.

The proposals the cabinet will discuss include limiting the exchange-rate margin of banks on foreign-currency mortgages, possibly to 0.5 percent, which would cost the industry about 50 billion forint ($223 million), Nepszabadsag reported.

Another is to allow borrowers to repay loans at the exchange rate at the time of the contract’s signing and opening the door for mortgage holders to seek compensation for the difference since the start of payments. That would cost OTP alone 250 billion forint, the newspaper said. The cabinet may also consider fixing installments on mortgage loans, extending the maturity of the contracts and other “significant” changes to loans, the daily said.

Court Ruling

Hungary’s supreme court, known as Kuria, on July 4 said a disputed OTP Swiss franc-based mortgage loan was valid, overturning a previous ruling that voided the contract. The top court at the same time imposed a retroactive limit on the exchange-rate margin OTP may charge, setting it at no more than 0.5 percent compared to the bank’s mid rate.

A blanket invalidation of foreign-currency loan contracts would risk triggering bank runs and a potential state default, Karoly Szasz, the head of the country’s financial regulator, said in a letter to the Kuria published June 20.

Orban, who came to power in 2010, essentially banned foreign-currency mortgage lending and temporarily allowed the early repayment of such loans at below-market rates, forcing lenders to swallow losses. That, along with Europe’s highest bank levy, made the industry unprofitable, sank lending, and cost Hungary its investment-grade credit rating.

Orban has since reneged on pledges to cut the bank levy and imposed further charges on them, including a financial transaction tax. He has called the government’s strategy part of a “fair” distribution of the costs of the economic crisis, while banks have said the policy damages lending and economic growth.

OTP competes with foreign banks including KBC Groep NV, Bayerische Landesbank, Erste Group Bank AG (EBS), Intesa SanPaolo SpA (ISP), Raiffeisen Bank International AG (RBI) and UniCredit SpA. (UCG)

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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