Bloomberg News

Hungary Seeks ‘Drastic’ Cut in Swiss Franc-Loan Exposure

October 17, 2011

(Updates with comment in second and third paragraphs.)

Oct. 17 (Bloomberg) -- Hungary wants to “drastically” cut the ratio of foreign-currency loans by early next year to reduce the country’s vulnerability to exchange-rate swings, said Janos Lazar, the ruling party’s parliamentary leader.

The governing Fidesz party may back rules and, “if necessary, sanctions,” that will encourage banks to allow borrowers to rid themselves of foreign-currency loans, Lazar told reporters in Budapest on Oct. 14. New measures may be approved this year, Lazar told a briefing today.

“I’m almost certain we will take further steps” this year, Lazar said. “My fellow members of parliament will be satisfied if hardly any foreign-currency loans remained in Hungary by next spring and instead we’d have forint loans that don’t pose exchange-rate risks.”

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to help borrowers after that currency rose to a record, boosting defaults and pushing up monthly payments. Prime Minister Viktor Orban last week said the government is considering “unexpected, unchartered” measures to escape its franc-debt trap.

“The goal is to drastically cut the ratio of foreign- currency borrowers by next spring,” Lazar said Oct. 14. “The state needs to craft regulations and, if necessary, sanctions to make banks allow the early repayment.”

Mortgage Plan

Lawmakers this year approved legislation allowing early repayment of foreign-currency mortgages at more than 20 percent below market rates, forcing banks to absorb the losses.

The European Union has said the 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 challenge the regulation at the Constitutional Court.

OTP Bank Nyrt., Hungary’s largest lender, competes mostly with units of international banks including Raiffeisen Bank International AG, Erste Group Bank AG, UniCredit SpA and Intesa Sanpaolo SpA.

The central bank estimates that 20 percent of a total of 18 billion euros ($25 billion) in foreign-currency mortgages may be repaid at fixed exchange rates.

While the government estimates between 20 percent and 30 percent of foreign-currency borrowers may take advantage of the opportunity, some commercial banks put the ratio as high as 60 percent, Lazar said.

The early repayment plan followed an extraordinary bank tax worth 120 billion forint ($554 million) a year, which the government imposed in 2010 to plug budget holes.

‘Significant Provisioning’

Erste Bank, 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 will inject 600 million euros into the subsidiary, the Vienna-based lender said on Oct. 10.

Austria’s Raiffeisen International Bank will announce an “additional significant provisioning” at its Hungarian unit on top of 100 million euros that was already announced, Raiffeisen said on Oct. 10.

The early-repayment plan may affect banks’ profitability and capital, Moody’s Investors Service said Oct. 5. The rating company placed Erste’s Hungarian unit on review for a downgrade along with OTP 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: Balazs Penz, Alan Crosby, Andrew Langley

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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