Hungary’s top court sent the forint and banking stocks soaring by ruling that judges must refrain from voiding $17 billion in foreign-currency denominated loans.
The loans are “neither invalid, immoral or usury” because of the fact that borrowers must bear the exchange-rate burden, Judge Gyorgy Wellmann of the court, known as the Kuria, said today in Budapest. Its decision is binding for lower courts.
Prime Minister Viktor Orban last month urged judges to take “the side of the people” rather than banks as he prepares for 2014 elections with borrowers struggling to repay mostly Swiss-franc denominated mortgages following a plunge in the forint. OTP Bank Nyrt., the nation’s largest lender, has dropped 17 percent since the government said in July that it’s considering legislation to retroactively change the terms of such contracts.
The decision is “clearly positive for the forint and for Hungary’s hard-currency debt,” Abbas Ameli-Renani, a London-based emerging-market strategist at Royal Bank of Scotland Group Plc, said by e-mail.
The forint, which has plunged 75 percent against the Swiss franc since 2008, rose 0.7 percent against the euro to 299.78 after the decision was announced, the strongest level in more than two weeks. OTP erased its losses today and rose 3.6 percent, the most in a month, to 4,344 forint. OTP’s competitors in Hungary include Erste Group Bank AG, UniCredit SpA (UCG), KBC Groep NV (KBC) and Raiffeisen Bank International AG. (RBI)
Hungarians held 1.8 trillion forint ($8.2 billion) of mortgages at the end of September and an additional 1.7 trillion forint in foreign-currency home-equity loans, which can be used for purchases other than housing. One in five of the loans is non-performing.
Unilateral changes by lenders in foreign-currency loan contracts that shift costs to the borrower in an unforeseen way don’t make the loans invalid, the court said. Banks had to inform borrowers of exchange-rate risks, it said.
Judges must strive to keep foreign-currency denominated loans valid, even if parts of them are deemed invalid, according to the Kuria. The court also said it would wait for a European Court of Justice ruling on when unilateral contract changes satisfy the requirement for legal transparency.
Court intervention isn’t the appropriate tool to deal with the adverse effect of foreign-currency loans and politicians need to pass appropriate laws if they want to help borrowers, the Kuria said.
“Legislative intervention would remove the competence of particular judges,” the court said.
The Kuria “sided with banks,” Orban’s parliamentary group leader, Antal Rogan, said today, the MTI state news service reported. The ruling party is still waiting for the court’s decision on unilateral changes to loan interest rates and on the exchange-rate margin banks use.
Rogan said Dec. 14 that the party would take the side of the people if the court didn’t, without elaborating.
Orban has pledged to phase out foreign-currency mortgages. In 2011, he forced banks to swallow $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates. The cabinet last month postponed presenting a plan to phase out foreign-currency loans, citing a lack of legal clarity. Instead, it widened a program allowing borrowers to temporarily repay loans at fixed exchange rates.
“Today’s court decision failed to provide the government with sufficient legal basis on which to determine its own package of measures to assist foreign-currency borrowers,” Nora Szentivanyi, a London-based economist at JPMorgan Chase & Co., said by e-mail. “We continue to expect such a package to come before the April parliamentary elections.”
The cabinet has also asked the Constitutional Court to consider whether foreign-currency loans are unconstitutional. The court won’t take up the issue this year, spokesman Andras Sereg said Dec. 13 by phone.
The efforts to aid borrowers contributed to “significant moral hazard,” Simone Zampa, a vice president at Moody’s Investors Service, said in a Nov. 25 report. Policies that negatively affect the banking industry may put downward pressure on Hungary’s Ba1 rating, which is one step below investment grade, Moody’s said Nov. 8.
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