Tim Gosling in Prague -

Hungary's conversion of foreign currency loans is now set to take place only next year, the economy minister said on July 21. The delay is likely to have been pushed by concern on the part of the central bank over the potential effect on the markets, but the key question remains the pace of conversion pushed by the government.

Contradicting earlier statements from officials, which had said forex loans would be a thing of the past by Christmas, Mihaly Varga said in an interview with hvg.hu that the second phase of the government scheme will only happen in 2015. Varga said the government would submit a bill on the conversions late in November or early in December, according to Reuters. Asked if this meant the conversion could come only next year, he said: "Yes, that is expected, but the legislation must be passed this year for that."

Like many in the region, Hungarians took out a huge volume of mortgages in Swiss francs and euro in the boom years to 2008 when the local currency was soaring in value. However, since the crisis the forint has sunk, multiplying repayments. Prime Minister Viktor Orban's government has treated the banks roughly since coming to power in 2010 via new sectoral taxes, and has been pushing a scheme to ditch forex loans for over 12 months. 

The PM has also said that he wants to see greater local ownership of the country's banks. However, saddled with huge portfolios, the Eurozone groups that own most of the larger lenders insist they are committed to the market. Some see the continued pressure from Budapest as a means of lowering valuations. 

The bill on the first phase of the forex loans relief scheme, which will see lenders forced to compensate borrowers for exchange rate spreads and other "unfair" charges, was passed in June. The banks have been lining up to report estimated losses.  

Erste Bank Group and Raiffeisen Bank International - amongst the largest lenders in Central and Eastern Europe - have suggested the forex loan scheme will cost them over €100m each. Italy's Intesa Sanpaolo announced on July 21 that it expects the scheme to hit second-quarter profit at its CIB Bank unit to the tune of €65m. The same day, Budapest Bank - owned by GE Capital - reported it expects to lose $85m. Bayerische Landesbank's MKB said it has built in provisions worth HUF5.1bn (€16.5m) for the first half of 2014 to cover the refunds.

The banks have now reported expected losses of over half the HUF700bn-900bn expected by the central bank, write analysts at Commerzbank. All of the banks have said they plan to challenge the first phase legally, and Hungarian courts say they are preparing for an avalanche of cases. 

However, lenders are now bracing for the second phase, which threatens a lot more pain. While every forex borrower will be aware by the end of the year how much they will be entitled to have refunded by the banks, and how exactly the conversion of forex loans into forints will take place, the latter will likely not happen until 2015, Varga said, according to Portfolio.hu. 

While lenders know forex loans will be phased out, two major questions remain over the conversion. Firstly, Budapest has suggested it will force lenders to convert the loans at rates favourable to borrowers. Perhaps even more importantly, it clearly wants to have the issue wrapped up quickly. An instant conversion would put a great strain on the banks, who continue to call for a drawn-out scheme. With the European Central Bank set to report on its stress tests in October, concern that some bank groups will need to raise capital is rising.

Abnormal

Given the raised level of non-performing loans (NPLs) over the past 12 months as borrowers await the new relief scheme, a further delay initially looks to be bad news. In addition, the uncertainty will also discourage banks from lending again. However, some suggest current conditions will help alleviate the effects on the credit markets at least.

"Under normal circumstances, a detrimental development," write analysts at Commerzbank, "but with global liquidity still abundant, we are not in a 'normal' environment, so FI-neutral to positive. [Mean]while the [forex] environment remains driven by NBH whims," they add, with the National Bank of Hungary expected to continue its easing cycle on July 22.

However, with the US Federal Reserve scheduled to halt quantitative easing in October - which remains the major element behind the money washing around the world - a later conversion of the loans threatens to raise Hungarian bond yields, points out Reuters. Meanwhile, the forint will also be exposed, as the banks will be forced to buy euro and Swiss francs. 

While the central bank helped out with a previous forex loans scheme pushed through by Budapest in late 2011 - which cost the banks over €1bn - by selling foreign currency to lenders, at least two NBH officials have said it would not be able to cover conversion of all the country's forex loans in one fell swoop, according to Reuters. Deputy Governor Adam Balog, part of a senior NBH management very close to Prime Minister Viktor Orban, has warned that any solution should be cautious to avoid market turbulence.

"We expect a gradually higher EUR/HUF, reaching 320 levels by early 2015," write analysts at Citigroup. "Therefore we believe the NBH would need to react to rising pressure on the HUF which in our view suggests that the NBH is unlikely to support the full coverage of household FX debt conversion from the FX reserves. On household FX loan conversion plans our take from our meetings were that there does not seem to be a clear political decision about the details and pace of the conversion and the procedure could be implemented in two or more steps to mute market impacts."