Bloomberg News

Erste Sees Losses in Hungary as Orban Fights ‘Debt Slavery’

October 28, 2011

(Updates with Erste fine in penultimate paragraph.)

Oct. 28 (Bloomberg) -- Erste Group Bank AG expects to be unprofitable in Hungary in the “next couple of years” as the country forces lenders into losses on foreign-currency loans, part of Premier Viktor Orban’s fight against “debt slavery.”

“We don’t expect in the next couple of years to have a very profitable operation,” Erste Chief Executive Officer Andreas Treichl told analysts in a conference call today. “We believe that, no matter what actually will happen now in terms of the conversion of the Swiss-franc loans into forint, the government will continue to take action that will not be positive for the Hungarian banking system.”

Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to help borrowers after the Alpine country’s currency rose to a record, boosting defaults and pushing up monthly payments. Orban, speaking on state radio today, gave the example of a person who owes more than the initial loan after years of repayment.

“That’s what is called debt slavery,” he said. “I don’t want to live in a country where 1 million people must face debt slavery. I’ll change this.”

Lawmakers in Budapest last month approved a law that allows the early repayment of foreign-currency mortgages at more than 20 percent below market rates. Vienna-based Erste, eastern Europe’s second biggest lender, is now remodeling its local unit “with the goal to make it substantially more independent” as it seeks to ring-fence its exposure to Hungary.

‘Expect Everything’

Hungary last year levied an extraordinary bank tax to raise 120 billion forint ($553 million) a year to plug budget holes. The government is considering “unexpected, uncharted” measures to escape its franc-debt trap, Orban said this month.

“Those who had been earning from this debt slavery are now fighting against Hungary,” Orban said today. “We are under attack because of the loan repayments.” Our “Austrian brothers-in-law are at the forefront of this,” he said.

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. Local banks have vowed to take their case to the Constitutional Court.

“We have to expect everything,” Treichl said when asked whether he expects Orban to force banks to swap Swiss franc- denominated mortgages into forint at below-market rates. “I expect a lot of things, but I do think there is a limit with regard to irrational populist measures in EU countries.”

Erste today was fined 10 million forints by the Hungarian regulator for a misleading phrase on its application form for taking advantage of the foreign-currency mortage repayment plan.

In Hungary, Erste competes with OTP Bank Nyrt., the country’s largest lender, and units of international banks, including fellow Austrian Raiffeisen International Bank AG, UniCredit SpA and Intesa Sanpaolo SpA of Italy, Germany’s Bayerische Landesbank and KBC Groep NV of Belgium.

--Editors: Balazs Penz, Paul Abelsky

To contact the reporters on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net


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