Hungary Verdict to Pave Way for $15 Billion FX Loan Plan

Hungary’s supreme court will complete its precedent rulings today on foreign-currency mortgages, paving the way for the government to phase out loans worth about $15 billion.

The court, known as Kuria, will brief reporters at 12:30 p.m. in Budapest on its decisions, including on exchange-rate margins on the loans, unilateral changes to lenders’ interest rates and the fairness of the mortgages, and examine whether unclear information provided by banks on exchange-rate risk can render contract clauses unfair and entire loans invalid.

Prime Minister Viktor Orban, who was re-elected in April to another four-year term, has pledged to phase out household foreign-currency loans once the Supreme Court hands down its decisions. The plunge of the forint after the 2008 global financial crisis led to soaring repayments and defaults on foreign-currency loans, which became widespread last decade as borrowers sought lower interest rates.

“I expect the Kuria verdict will cause limited financial pain for Hungarian banks, but the government will test the boundaries further and choose a somewhat more drastic solution for the phase-out of these loans,” Akos Kuti, a Budapest-based analyst at Equilor Befektetesi Zrt., said June 13 by phone. Kuti estimates the court’s ruling will cost banks about 100 billion forint ($441 million) in repayments to borrowers.

Legal Phaseout

Hungary’s government will propose legislation to phase out foreign-currency mortgages following the top court’s ruling, Economy Minister Mihaly Varga said today. The planned measures will help ease the burden of foreign-currency mortgage borrowers and won’t deal with home-equity loans, Varga said.

Foreign-currency mortgages amounted to 1.78 trillion forint while home-equity loans amounted to 1.64 trillion forint at end of March, according to central bank data.

OTP Bank Nyrt., Hungary’s largest lender, plunged 9.1 percent in the past two weeks, compared with a 3.3 percent drop in the benchmark BUX stock index. The forint weakened 0.2 percent to 307.3 per euro by 10:11 a.m. in Budapest. It’s fallen 3.3 percent this year, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg.

The Kuria ruled against OTP on June 3, saying the bank used unfair exchange-rate margins in a foreign-currency mortgage. The court may today elevate that ruling to a legal uniformity decision, which will be binding on lower courts. It will also consider whether unilateral changes to loan interest rates by lenders were fair and if they weren’t, how the loans should be amended.

Foreign Lenders

“We’re all waiting for the Kuria to declare that unilateral changes to contracts and the exchange-rate margin used were unfair and that these defrauded borrowers of 500 billion forint,” or $2.2 billion, “which must be returned to them,” Orban’s ruling party said in a statement yesterday.

OTP competes mostly with foreign lenders in Hungary including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Bayerische Landesbank, Intesa SanPaolo SpA and KBC Groep NV.

“Regarding the crucial issue of unilateral interest-rate changes, I don’t see how the court could dismiss banks’ ability to modify interest rates and order a wholesale invalidation of this practice,” Phoenix Kalen, a London-based strategist at Societe Generale SA, said June 13 by phone.

The verdict on interest-rate changes may require borrowers to resort to courts on a case-by-case basis, limiting the adverse impact on banks, according to Kalen.

Forint Loans

Any retroactive change to foreign-currency loan terms must “take into account the interests of both parties as much as possible,” the Constitutional Court ruled March 17.

The government is considering several ways to phase out foreign-currency mortgages, including converting the loans to forint, Varga said June 12 on public radio.

Orban, who’s sought to force banks to bear more responsibility for the spread of foreign-currency loans, imposed Europe’s highest bank levy and in 2011 forced lenders to swallow $1.7 billion in losses on the early repayment of some mortgages at below-market exchange rates. The cabinet also set up a program allowing to temporarily fix the exchange rates used for installments.

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