Hungary Widens Scope of FX Loan Bill After Court Ruling

Hungary plans to extend the scope of a bill originally aimed at aiding borrowers holding $15 billion in household foreign-currency mortgages, following a top court ruling that said many of these loans had unfair terms.

The government’s planned legislation will apply to all household foreign-currency loans, including consumer loans, and not just mortgages, Economy Minister Mihaly Varga told reporters in Budapest following a cabinet meeting. The cabinet will submit the draft to Parliament this week, he said.

The bill will void exchange-rate margins and unilateral interest-rate changes banks applied to foreign-currency loans, Index news website reported, citing ruling party parliamentary group leader Antal Rogan. Banks will have 15 days to appeal the rule, which will apply to existing loans and ones that expired within the last five years, Index reported.

“The speed and scope of the moves seems more aggressive, including the backdating,” Peter Attard Montalto, a London-based economist at Nomura International Plc, said by phone.

Prime Minister Viktor Orban, who was re-elected in April to a second four-year term, has pledged to phase out household foreign-currency loans. The government will start negotiations with the central bank on the conversion of such loans to forint, Varga said today. The forint’s plunge after the 2008 global financial crisis led to soaring repayments and defaults on mostly Swiss-franc denominated loans, which became widespread last decade as borrowers sought lower interest rates.

Shares Drop

Shares in OTP Bank Nyrt., Hungary’s largest lender, dropped as much as 2 percent, before trading 1.3 percent lower at 4,392 forint by 4:41 p.m. in Budapest, the lowest on a closing basis since May 15. The forint depreciated 0.3 percent to 306.9 per euro.

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

Backdating the government’s planned rule so that it applies to foreign-currency loans that expired as long as five years ago may raise the cost to lenders by as much as 20 percent to 500 billion forint, or $2.2 billion, Janos Samu, an economist at Concorde Ertekpapir Zrt. in Budapest, said in an e-mailed report.

Foreign-currency mortgages amounted to 1.78 trillion forint while home-equity loans totaled 1.64 trillion forint at end-March, according to central bank data. There were 181 billion forint in foreign-currency denominated car loans and 38 billion forint in foreign-currency consumer loans.

High Bar

The top court, known as the Kuria, set a “high bar” for proving that unilateral changes by banks to such contracts were fair, Justice Gyorgy Wellmann told reporters on June 16 in Budapest following a ruling. The court also said exchange-rate margins used by lenders on the loans were unfair. The ruling is binding for lower courts.

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.

Loan Conversions

The government has said it will unveil its plan on the conversion of foreign-currency household loans to forint following Parliament’s summer recess.

The conversions may have “limited direct impact” on the forint if the central bank uses its foreign-currency reserves to help banks convert the loans to forint, Concorde’s Samu said. The central bank may still retain adequate reserve levels following the conversions, Samu estimated.

“Calculations of the impact on banks remains very difficult but we are probably now pushing 4 billion euros” in terms of the total “transfer of wealth from banks to households,” including the cost banks may have to bear on the conversion of foreign-currency loans to forint, Montalto said.

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