ECJ gives Hungary a boost in forex loans fight

By bne IntelliNews February 13, 2014

bne -

The Hungarian government received a boost on February 12 in its battle to push the country's banks into concessions on foreign currency loans before elections in April, when an advisor to Europe's top court said Hungarian courts are entitled to change exchange-rate margins on the loans if unfair.

Advocate General Niels Wahl of the European Court of Justice (ECJ) said in a non-binding opinion that local courts can examine the fairness of exchange-rate margins and "replac[e] the term at issue with a supplementary provision of national law," according to Bloomberg. The Luxembourg court will now discuss the case. It generally takes three to four months to deliver a ruling, with advocate opinions followed in the majority of cases.

The announcement is a blow to the mostly foreign-owned banks, who are fighting the government's bid to make them help Hungarian borrowers who took out forex mortgages in Swiss franc and euro during the boom, but have since seen their installments hiked by a weaker forint. A temporary scheme in late 2011 saw the banks forced to shoulder huge losses.

Prime Minister Viktor Orban has pushed Hungarian courts to offer his government a legal framework for a new scheme that it says will wipe out all forex debt from the country. The ruling Fidesz party is desperate to have the scheme give it a boost in the upcoming elections. Late last year the Kuria - Hungary's top court - ruled that overall the contracts behind the loans were valid, but said it would wait for a ruling from the ECJ on clauses within loan contracts which allow the banks to adjust exchange rate margins.

It is "for the national court to determine whether the consumers were in a position to understand that they would be subject to additional expense by reason of the difference between the two rates of exchange," the statement from the ECJ said. The markets were unimpressed, and OTP - Hungary's biggest bank - saw its stock price drop 2.8% following the announcement, reports Bloomberg.

However, the losses were limited because the bigger issue, according to analysts, is the Kuria's upcoming decision on the unilateral amendment of terms in the contracts, for which the government asked in December in the hope of fast tracking the process. On February 11, the Constitutional Court said it needs more time to study the question.

The ECJ adviser's opinion "boosts the government's case for having these contracts amended," writes Tim Ash at Standard Bank, suggesting the Kuria's decision "is now likely to come in line with the EU view."

"This will boost the government's position in on-going negotiations with banks over resolving the still difficult issue," he adds. "All told this is not great for foreign banks ... and will further the process of bank deleveraging out of Hungary."

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