Hungary seeks constitutional shortcut for forex loan legislation

By bne IntelliNews December 2, 2013

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The Hungarian government asked the constitutional court on November 29 to consider whether the contracts behind the country's huge volume of foreign currency loans are unconstitutional. The request is part of the ongoing push by Prime Minister Viktor Orban to pave the way for legislation that would quash the debt - and likely pile more misery on the banks - ahead of elections due by the spring.

Citing a motion submitted by the justice ministry, state news agency MTI wrote that the court has been asked to consider whether the conditions on the loans breach the constitution's guarantee of fair competition, which would trigger action against any abuse of dominant market position to protect consumers. The ministry asked the court to rule on whether some conditions in the contracts, such as making borrowers bear the risks of exchange rate losses or allowing banks to raise interest rates unilaterally on the loans, are unconstitutional.

The government said in the summer it would seek to finally resolve the forex debt issue, which stems from the huge volume of mortgages granted in Swiss francs and euros during the boom, when the forint was riding high. Borrowers have since seen their instalments skyrocket as the Hungarian currency has lost ground through the crisis.

That has made the issue a clear vote winner in the next election, while the ruling Fidesz is seeking to boost its ratings without upsetting the government's fiscal balance. In addition, the vulnerability of borrowers to movement in the value of the forint is one of the few brakes remaining on the government's erratic policy making, and also restrains the hand of the central bank, which is nearing the self-declared limit of its 16-month easing cycle, designed to help boost economic recovery ahead of the the vote.

"The latest twist in a very long running saga, but which continues to create negative headline risk for Hungary. With elections due by April, the issue is clearly very political, and likely a vote winner still for the Fidesz government," commented Tim Ash at Standard Bank. "The government no doubt will argue that this was a classic case of mis-selling, akin to similar bank mis-selling of mortgage products in the US, and UK, and perhaps they have a case. As I have argued though, hindsight is wonderful, and banks, regulators, and consumers got this wrong in the 00s, when Hungary did appear set for single currency membership in the very near future. There were indeed few people arguing against this lending back then."

A temporary scheme in 2011 hit the banks for huge losses - which were compounded earlier this month when several of the biggest lenders were fined for having conspired to limit access to the scheme. The government has said it will impose a programme that will see forex loans phased out entirely, but is struggling with the legality of the move.

Fidesz has recently been pushing the Kuria - Hungary's top court - to rush through a stockpile of cases brought by forex borrowers. Although Hungarian law does not work on precedent, the Kuria said in late November that it will decide on a framework for fast-tracking them. Constitutional guidance, or even a ruling, would clearly help accelerate the issue. The justice ministry has also asked for the constitutional court's opinion on how forex loan contracts can be modified by legal means.

All of which is more bad news for the banks, which are starting to drift towards the exit with Fidesz looking set for another term. Orban has openly called for Hungarian ownership to replace the foreign banks, but with Bloomberg estimating that they hold around $17bn in forex loans, plus a significant volume of non-performing loans, it will take some time for the banks to escape.

"A ruling against the banks would likely continue the foreign bank de-leveraging process in Hungary," suggests Ash, "albeit there is a limit to how quickly foreign banks can exit, and clearly most are relatively 'captive'". BayernLB - which owns Hungary's fourth largest bank MKB - said last month it will spin off its problematic assets in order to sell the rump bank.

The government is not only seeking to reduce forex debt by attrition. In place of the commercial banks, which have largely stopped lending due to their rough treatment, the central bank is also pumping cash into the economy via its Funding for Growth Scheme (FGS). Noting that private sector lending dropped 3.9% year on year in October, Commerzbank analysts wrote in a December 2 note: "The breakdown reveals complex and interesting dynamics: a lot of the decline came in [forex] segments where the government's FGS scheme is driving rapid repayment."

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