Hungary rekindles investor fears with foreign currency loan plan

MBH Jelzalogbank Nyrt

18/07/2013 16:38

* Forint drifts lower, OTP Bank shares fall sharply * Government looking into ways to change FX loan contracts * Focus of changes will be on exchange rate, government says By Krisztina Than BUDAPEST, July 18 (Reuters) - Hungary's new plan to help households laden with foreign currency mortgages has set off alarm bells for investors who believe Prime Minister Viktor Orban is restarting a drive that has already cost big businesses millions of euros. In the past three years Orban has imposed "crisis taxes" on telecoms and energy firms, and banks have incurred large losses because of his policies. This year, however, the flow of radical policies has eased, giving investors some respite. Now markets are worried that Orban, who is seeking re-election next year, is preparing to resume his push on business after his government announced plans to modify contracts that borrowers signed with banks to secure foreign currency mortgages.  ID:nL6N0FM437   ID:nB3N0CV000  The Justice Ministry said borrowers should not be faulted for being unable to service debt for external reasons such as a deteriorating exchange rate. "This is a very drastic potential step that they are considering," said Peter Attard Montalto of Nomura. Hungary's forint currency  EURHUF=  weakened one percent on Thursday, a fall traders said was linked to nervousness about the mortgage plan. Shares in OTP  OTPB.BU , Hungary's biggest lender, have fallen almost 9 percent in the past two days. Orban's government has not said in what way it proposes to  modify the contracts, and it is not clear whether the changes would only affect non-performing loans or all foreign currency mortgages.   "Markets are concerned, but it's a guessing game at this moment," said Zoltan Arokszallasi at Erste Bank. The track record of Orban's government, though, suggests the plan will help households and may incur fresh losses for the banks. Struggling borrowers are likely to be an important constituency in next year's election. Opinion polls show Orban leads the opposition, but there are still many undecided voters and they will decide the outcome. QUICK DECISION Many of the mortgages in Hungary are owned by foreign banks such as Austria's Raiffeisen  RBIV.VI , Belgium's KBC  KBC.BR  and Italy's Unicredit  CRDI.MI . Large numbers of Hungarians - as elsewhere in central Europe - took out home loans in foreign currencies because the terms were better than forint mortgages. Since then, exchange rate moves have made the loans much more expensive, leading many people to fall behind in their repayments. Orban has spoken out in defence of borrowers, and talked about a need for investors who made huge profits in previous years to take their share of the burden. The government's new plans surfaced in the wake of a court ruling on the issue earlier this month, which disappointed many borrowers by finding the loan contract in question was valid. ID:nL5N0FA2LG  After the verdict, the ruling Fidesz party said the court was on the side of banks and described the decision as outrageous.  Bankers contacted by Reuters declined to comment on the government's proposal. The government appears to be in a rush to implement its new mortgage plan, about which nothing was known until Tuesday evening. The cabinet is planning to debate the proposals next week and legislation could go to parliament in the autumn session. The government had said several times that it planned no further measures to help household borrowers. Timothy Ash of Standard Bank said the new scheme was a "classic case of Orbanitis. i.e. policy made on the hoof. And just when Hungary was looking pretty good, with the government behaving in a very market friendly way." It would not be the first time Orban's government has intervened with foreign currency loans. In 2011, it imposed a scheme that allowed people to repay their loans early, but at an exchange rate more favourable for the borrowers. It has also implemented other schemes. That contributed to the banking sector posting losses of 243 billion forints ($1.1 billion) and 161 billion forints in the past two years. However, many borrowers could not benefit from previous relief schemes. At the end of last year 19.3 percent of household foreign currency loans were non-performing, according to a June report by financial supervisor PSZAF. Margit Abonyi, is typical of the Hungarians still weighed down by foreign currency mortgages. Her daughter took out a loan in Swiss francs in 2007. That loan has now nearly doubled in size, because of exchange rate changes. The bank terminated the loan contract in April after the family had been unable to pay instalments for a year. Abonyi had to agree with the bank to sell her daughter's flat, and her own apartment which she had used to secure the loan. "It would be great (if the government helped) but it may be too late for us," Abonyi told Reuters. (Reporting by Krisztina Than; Editing by Toby Chopra) ((krisztina.than@thomsonreuters.com)(+36 1 327 4745)(Reuters Messaging: krisztina.than.thomsonreuters.com@reuters.net)) Keywords: HUNGARY FXLOANS/GOVERNMENT