Bloomberg News

Orban Sees More ‘Unchartered’ Steps to Escape Hungary Franc Trap

October 11, 2011

Oct. 11 (Bloomberg) -- Hungary, which is forcing lenders to swallow losses on Swiss franc loans, must escape its dependence on foreign currencies by moving in an “unexpected, unchartered and unknown” direction, Premier Viktor Orban said.

“Hungary needs to break out of its foreign-currency debt,” Orban told lawmakers in Budapest today. “We have to break out of this trap, just as we did with the early-repayment plan, in a direction that’s unexpected, unchartered and unknown to everyone. We have to implement this policy fully, and this is the most important task for next year.”

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to help borrowers after the currency rose to a record, boosting defaults and pushing up monthly payments.

Lawmakers last month approved a law that allows the early repayment of foreign-currency mortgages at more than 20 percent below market rates and forces lenders to absorb exchange-rate losses on the loans. The measure followed an extraordinary bank tax in 2010 to raise 120 billion forint ($554 million) annually to plug budget holes.

The European Union has said the mortgage plan may violate its rules, while Hungary’s central bank warned that local lenders will suffer “significant” losses, causing damage to lending and growth prospects. Hungarian banks have vowed to take their case to the country’s Constitutional Court.

Erste Group Bank AG, eastern Europe’s second-biggest lender, became the first foreign bank to recapitalize its Hungarian unit after the mortgage-loan plan came into effect.

Erste Provisions

Erste will inject 600 million euros ($817 million) into the subsidiary, the Vienna-based lender said in a statement yesterday. The bank, which expects a loss of 500 million euros in Hungary this year, is provisioning an additional 450 million euros to cover credit losses caused by the mortgage plan and worsening economic prospects. Austria’s Raiffeisen International Bank AG will announce an “additional significant provisioning” at its Hungarian unit on top of 100 million euros that was already announced, it said yesterday.

The early-repayment plan may affect banks’ profitability and capital, Moody’s Investors Service said on Oct. 5. The rating company placed Erste’s Hungarian unit on review for a downgrade along with OTP Bank Nyrt. and its mortgage arm, Foldhitel es Jelzalogbank Nyrt., as well as the local units of KBC Groep NV, General Electric Co. and Bayerische Landesbank.

--Editors: Jennifer M. Freedman, James Hertling

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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