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Hungary Can Amend Foreign-Currency Loan Terms, Court Says

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March 17 (Bloomberg) -- Hungarian lawmakers can retroactively amend the terms of some loan contracts, the Constitutional Court said in response to a government request concerning about $15 billion in foreign-currency mortgages.

Private contracts can be amended by lawmakers under “extraordinary circumstances” involving a large number of similar cases where one party’s interest is disproportionately hurt by changed circumstances, Constitutional Court President Peter Paczolay said today in Budapest. The government plans to to phase out such loans after parliamentary elections, ruling party lawmaker Gergely Gulyas said today.

“Contracts can be retroactively amended only in extraordinary cases when circumstances changed significantly in a way that couldn’t have been foreseen at the time of the contract’s signing,” Paczolay said at the public announcement of the ruling. “The changes must be made by taking into account the interests of both parties as much as possible.”

Prime Minister Viktor Orban, who faces elections on April 6, has said he wants to phase out household foreign-currency loans and help borrowers struggling to repay mostly Swiss franc-denominated mortgages following a drop in the forint. The cabinet in November postponed a decision on helping borrowers, citing the lack of legal clarity.

Forint, OTP

The forint, which has plunged 43 percent against the Swiss franc since mid-2008, was little changed at 312.2 per euro by 2:12 p.m. in Budapest, extending its loss this year to 4.8 percent. OTP Bank Nyrt., the country’s largest lender, rose 2.3 percent to 3,707 forint.

Hungarians held 1.75 trillion forint ($7.7 billion) of mortgages at the end of January and an additional 1.6 trillion forint in foreign-currency home-equity loans, which can be used for purchases other than housing, according to central bank data. In 2011, Orban forced banks to swallow $1.7 billion in losses on early repayment of some mortgages at below-market exchange rates.

OTP competes with mostly foreign-owned banks including Erste Group Bank AG, UniCredit SpA, KBC Groep NV, Intesa SanPaolo SpA and Raiffeisen Bank International AG.

Banks must bear the brunt of the costs in changes to foreign-currency loans, while the state and borrowers will also having to shoulder part of the burden, Gulyas said.

Lawmakers, if they choose to amend the terms of private contracts, must be able to prove the need for such a step and the Constitutional Court can rule on its validity, Paczolay said.

Phasing Out

“The Constitutional Court’s ruling confirms the government’s steps so far, which sought to strike a balance among various interests,” Economy Minister Mihaly Varga said today, MTI news service reported. The next government should continue to phase out foreign-currency loans, he said.

The supreme court, known as the Kuria, in a separate ruling rejected a blanket invalidation of these loans in December while an adviser to the European Court of Justice said Feb. 12 that local courts can force banks to replace unfair contract terms for customers The government has said it would wait for a decision by the Kuria, which is expecting an official EU ruling.

The government can submit legislation on foreign-currency loans within one month of the Kuria’s ruling, Gulyas told reporters in Budapest today.

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net Paul Abelsky, James M. Gomez

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