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Hungary Focuses on Exchange Rates in Potential Loan Overhaul

Hungary’s potential new legislation to retroactively rewrite foreign-currency loan contracts will probably focus on the losses borrowers incurred from exchange-rate movements, according to the Justice Ministry.

“The Justice Ministry is examining how the bank contracts may be rewritten via legislation by citing a fundamental change in the circumstances,” it said in an e-mail today. “Such a circumstance justifying the modification of the contract is primarily the exchange-rate differential.”

The government’s aim is to help Hungarian home buyers who for years borrowed mainly in Swiss francs to take advantage of lower interest rates until a drop in the eastern European country’s currency sent repayments soaring and stoked bad debt. Hungarian borrowers held 3.7 trillion forint ($16.5 billion) of foreign-currency mortgage loans as of March 31, mostly denominated in Swiss francs, according to central bank data.

Shares in Hungary’s largest lender OTP Bank Nyrt. fell and the forint weakened after Justice Minister Tibor Navracsics said two days ago that the cabinet was considering such legislation. Clients “can’t be faulted” if they’re unable to repay their debt because of an “external” reason such as the spike in the exchange rate, the ministry said, adding that the cabinet will discuss the possible solutions on July 24.

OTP, Forint

OTP dropped 5.4 percent, the most since April 2012, to 4,585 forint by 2:21 p.m. in Budapest. The stock has weakened 9 percent in the past two days. The forint depreciated 0.8 percent to 294.75 per euro, its weakest since July 9.

That decline pared the forint’s gain in the past three months to 1.3 percent, still the best performance among 24 emerging-market currencies tracked by Bloomberg. It plunged 15 percent, the most in the world, in the second half of 2011 when the government announced plans to allow the temporary early repayment of foreign-currency loans at below-market exchange rates, forcing lenders to swallow losses.

The options the government is now considering include cutting borrowers’ costs from a weaker forint or eliminating them altogether, the Budapest-based newspaper Magyar Nemzet reported today, citing unidentified people with knowledge of the proposals. Banks may have to incur all or part of the costs from the overhaul, the newspaper said.

Nothing Dramatic

Hungary plans no “dramatic” measures that would have “turbulent consequences” by helping foreign-currency borrowers, OTP Deputy Chief Executive Officer Daniel Gyuris said on March 19.

Prime Minister Viktor Orban effectively banned foreign-currency mortgage lending in 2010 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, choked lending, and cost Hungary its investment-grade credit rating.

Hungarian banks may face their third consecutive year of losses as a result of “punitive” bank taxes, high credit risks and a struggling economy, Fitch Ratings said July 3. The central bank has implemented a Funding for Growth plan, offering zero interest-rate funding to banks to spur lending and accelerate the economic recovery from a recession last year.

“The frequently changed regulatory environment, the ad hoc measures, new tax burdens and the extremely short deadlines for introduction make planning impossible for the economy and hamper operation and compliance,” the Hungarian European Business Council said in a country report published today in Budapest.

Members of the organization include the local chief executives of 14 multinational companies that are among the biggest investors in Hungary, including British American Tobacco Plc, Ericsson AB, Nestle SA and Nokia Oyj.

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