Hungarian Courts Can Amend FX Loans, EU Court Aide Says

Hungary’s courts can force banks to replace unfair contract terms for customers holding about $15 billion of foreign-currency loans, an adviser to the European Union’s top court said in an opinion that may pave the way for losses at lenders.

EU law doesn’t prevent national courts from examining the fairness of contract clauses and “from replacing the term at issue with a supplementary provision of national law,” Advocate General Niels Wahl of the EU Court of Justice said in a non-binding opinion today. Shares of OTP Bank Nyrt., Hungary’s largest lender, dropped.

Prime Minister Viktor Orban, preparing for elections on April 6, has urged courts to “take the side of the people” and help borrowers struggling to repay mostly Swiss franc-based mortgages following a drop in the forint. The country’s supreme court in December rejected a blanket invalidation of the loans. Hungary’s constitutional court, at the government’s request, is examining the constitutionality of foreign-currency loans and whether lawmakers can retroactively amend loan terms.

The opinion “will boost the government’s position in ongoing negotiations with banks over resolving the still difficult issue of FX loans,” Tim Ash, chief emerging-markets economist at Standard Bank Group Plc. in London, said in an e-mail. “This is not great for foreign banks operating in Hungary and will further the process of bank deleveraging out of Hungary.”

Top Court

Today’s case was triggered by a Hungarian couple’s challenge to the system of exchange-rate margins used by lenders. Hungary’s top court referred the case to the EU tribunal last year for guidance on national judges’ powers.

National courts have “to determine whether the consumers were in a position to understand that they would be subject to additional expense by reasons of the difference between the two rates of exchange,” the EU court adviser said.

The Luxembourg-based court follows the advice of its advocates general in most rulings, which usually come about 6 months later.

OTP fell as much as 2.8 percent after the opinion was published today and traded down 2.3 percent at 4,163 forint at 2:41 p.m. in Budapest. OTP competes with mostly foreign-owned banks including Erste Group Bank AG (EBS), UniCredit SpA (UCG), KBC Groep NV (KBC), Intesa SanPaolo SpA (ISP) and Raiffeisen Bank International AG. (RBI)

Unquantifiable Problem

“It’s still not possible to quantify the foreign-currency loan problem of banks” after the EU opinion, which means “the uncertainty may remain until the” Hungarian supreme court “rules on the fairness of the contracts,” analysts at KBC Groep NV’s Hungarian brokerage said in an e-mail today.

The EU court must examine whether Hungary’s courts can review the fairness of exchange-rate margins lenders used on the repayments of foreign-currency loans and whether, if deemed unfair, they can change the specific clause instead of annulling the entire loan.

OTP declined to comment on the EU court opinion, the bank’s press department said in an e-mail today. The Economy Ministry didn’t respond to an e-mail seeking a government comment.

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 in November 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.

Monthly Installments

The Hungarian government asked the constitutional court to assess whether foreign-currency loan terms can be amended by lawmakers based on the presumed unfairness of certain clauses, including the exchange-rate margins banks used in calculating monthly installments and unilateral increases on the part of lenders in loan interest rates, according to a Constitutional Court statement yesterday. Justices discussed the case yesterday without arriving at a ruling, the court said on its website.

The case is: C-26/13, Kasler Arpad, Kaslerne Rabai Hajnalka v OTP Jelzalogbank Zrt.

To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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