Hungary Cabinet Plans Spot Rate FX Loan Switch: Nomura

Hungary’s government plans to propose converting billions of dollars worth of foreign-currency mortgages at the market exchange rate, Nomura International Plc said, citing unidentified policy makers.

Lawmakers may scuttle the plan and impose below-market exchange rates for the conversion to “claw back” tax rebates banks are expected to get after refunding clients for loan charges deemed unfair by courts, Peter Attard Montalto, an economist at Nomura in London, said in a report today. A rate about 10 percent below the market “should be the appropriate” one to offset the rebate, he said.

“The market may have strong reasons for optimism when the legislation is set out before parliament, but that could flip with its passage and the addition of a write-down with sub-market rates to do the claw-back,” Montalto said.

Prime Minister Viktor Orban’s government, reelected for another four-year term in April, is working to phase out foreign-currency loans that have burdened banks and borrowers as the forint plunged after the collapse of Lehman Brothers Holdings Inc. The cabinet has sought to force lenders to shoulder the bulk of the costs, while court rulings found elements of the mortgage loan contracts illegal.

Banks face refund obligations of as much as 1 trillion forint ($4.1 billion) for “unfair” charges, according to official estimates. The cabinet plans to convert $14.3 billion of such mortgages, mostly denominated in Swiss francs.

‘Uncertainties Persist’

The press departments of the Economy Ministry and Orban’s Fidesz party didn’t immediately respond to e-mails seeking comments on Nomura’s report. The conversion of foreign-currency loans will be done at below-market exchange rates, over the opposition of banks, Antal Rogan, the parliamentary leader of the ruling party, said on July 6.

“Officials currently suggest an at-market conversion rate on the FX loan redenomination, but uncertainties persist from populist implications,” Phoenix Kalen, an economist at Societe Generale SA in London, said in a report today after meeting unidentified government and central bank officials in Budapest.

OTP Bank Nyrt., the country’s largest lender, competes in Hungary mostly with foreign lenders including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA, Intesa SanPaolo SpA and KBC Groep NV.

Banks may earn tax rebates of as much as 250 billion as the refunds will retroactively lower their incomes as well as their 2009 balance sheet, the basis of a special tax, Nomura said. Hungary’s lenders pay Europe’s highest bank levy.

The government plans a one-time conversion of foreign-currency mortgages in the first half of next year, Nomura said, adding that the cabinet may expand conversions later to include other household foreign-currency debt and those of small and medium-sized companies.

To protect the forint, the central bank has said it will make available its foreign-currency reserves to commercial banks for the refunds and later for the conversion of foreign-currency loans.

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