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The Hungarian government can force the country's banks to make retroactive changes to loan contracts, the Constitutional Court ruled on March 17. However, it noted strong limits on any action, meaning Budapest will not be able to roll out the planned new scheme on forex debt ahead of the April 6 election.

The ruling is an interim decision in what has become a frustrating legal battle for Budapest. The government had hoped late last year to fast track a legal framework to support the implementation of a scheme to force the banks to shoulder losses on foreign currency loans ahead of elections on April 6.

Budapest turned to the Constitutional Court late last year a part of its bid to speed up the process, which thanks to the lack of legal precedent currently has thousands of lawsuits brought b'y borrowers trawling through lower courts on a case-by-case basis. In December, Hungary's supreme court - or Kuria - had ruled that the contracts are not illegal, and that lenders were not to blame for borrowers losses when the exchange rate changed.

The Kuria, however, refused to rule on whether it was permissible for contracts to be modified by a bank unilaterally, which was another of the government's claims. It said it will instead depend on a final ruling from the European Court of Justice, which is expected in the coming months.

The ECJ has hinted that it views the banks' actions somewhat negatively. However, the Constitutional Court's latest ruling clearly suggests that any legislation to force the banks to cover borrowers' losses should be limited buoyed the market. The country's biggest lender OTP saw its shares rise 4.55% by late afternoon trade; another local bank, FHB, was up over 7%.

Exceptional circumstances

The ruling comes just three weeks or so ahead of elections in Hungary. Seeking to secure another constitutional majority, the Fidesz government had said that it planned to have a new scheme to help borrowers who took out foreign currency loans ahead of the crisis, and have since seen their monthly installments skyrocket due to the weakening forint. A temporary programme in 2011 cost the banks over €1bn.

"Contracts can be retroactively amended only in extraordinary cases when circumstances changed significantly in a way that couldn't have been foreseen at the time of the contract's signing," Constitutional Court President Peter Paczolay said, according to Bloomberg. "The changes must be made by taking into account the interests of both parties as much as possible."

While it potentially opens the way for Budapest to look at the contracts, the limits are made clear. Should lawmakers choose to amend private contract terms, they must be able to prove the need for such a step, Paczolay said, adding that the court will retain the right to rule on the validity of any action.

That clearly suggests Budapest must hold fire on any significant measures against the banks. When the government surprised in the summer by saying it planned to develop another scheme on forex loans - which are reported to total around HUF3.4 trillion (€10.9bn) - along with a promise to phase them out of the market completely, the banking association was invited to negotiate a package. However, the government rejected its offers and declared that it would come up with a plan itself.

Temporary relief

While the ruling offers the banks some temporary relief, they will be closely watching the upcoming election. The main question over the vote is widely believed to be the extent of Fidesz' victory - whether a simple or constitutional majority - rather than the make-up of the next administration. Another constitutional majority could well spell bad news.

Government officials insisted that the court ruling was a positive. Gergely Gulyas, a Fidesz deputy, said he welcomed the ruling as "a clear message" to legislators. "Fidesz does not want a single forex mortgage contract to stay in place," he reiterated to news agency MTI.

Economy Minister Mihaly Varga said there are now fewer forex borrowers and the country is less vulnerable thanks to government measures backed by the court. After the general election, the next government should continue to phase out forex loans from the market, he added.

Meanwhile, analysts suggest that regardless of any legal moves, simple economics means the banks will have to take on part of the burden. The crux of the ongoing tussles in the upper courts then becomes a matter of jockeying for position ahead of more negotiations.

"No matter which way the pendulum of court rulings swings, it is highly likely that individual loan contracts will be put up for legal dispute at lower courts over the coming year, and that banks would have to bear at least a part of the [forex] loss which consumers have built up on their accounts," Commerzbank writes. "This follows, not from legal details, but from simple solvency considerations: consumers will not be able to pay back in full, no matter what the courts rule, hence this is a question of how to work out a compromise settlement."