UPDATE - Hungary govt, banks sign agreement on escape route for FX borrowers

The government and the Hungarian Banking Association signed an agreement on Thursday that gives an escape route to borrowers with foreign currency-denominated mortgages, National Economy Minister Gyorgy Matolcsy said.

Mr Matolcsy said the series of talks with banks were very difficult but also very successful, in the end producing an agreement that shares the burden between the banking system, borrowers and the government, and which could reduce repayments of clients who join by 30-35%. The five-year agreement will reduce the burden of forex borrowers by HUF 900bn, he added.

The government will cover HUF 300bn of the amount and the banking sector HUF 600bn, he said. The government’s contribution will be made through the bank levy, from which banks can write off the burden of early repayment, he added.

Hungarian Banking Association chairman Mihaly Patai said the government saw the troubles of forex borrowers as a social problem, thus making the agreement of great importance.

Mr Matolcsy said the government had made a growth pact with the banking association that was expected to expand available credit for domestic SMEs, home-buyers and applicants for European Union funding.

Mr Patai said he thought the market would react positively to the agreement and it would have a good effect on the forint’s exchange rate.

The minutes of understanding on the agreement published on the government’s website show the government will submit a bill to Parliament according to which banks are entitled to refuse application for early repayment of forex mortgages at discounted exchange rates if borrowers fail to attach to their application by January 30, 2012 either a binding promissory note issued by another credit institution for an amount sufficient to cover the early repayment or the same amount in cash.

Banks will be allowed to deduct 30% of their losses from the early repayments from the bank levy. If the full 30% cannot be deducted, the non-deductable part can be deducted by another lender.

Banks agreed to undertake the conversion of non-performing forex mortgages to forint mortgages and cancel 25% of these borrowers’ debt by May 15, 2012, provided the value of the property serving as collateral did not exceed HUF 20m when the forex mortgage was signed.

Banks will be entitled to deduct 30% of the cancelled claims from the bank levy due in 2012.

The cancelled debt shall not incur payment obligations for the borrowers, either in the form of personal income tax or gift tax.

The delinquent forex loans will be converted at the average of the mid rates of the respective currencies published by the National Bank of Hungary for the period between March 15, 2012 and April 15, 2012. The 25% of the loan will be cancelled after the conversion.

Banks will also cancel 25% of the loans of borrowers who have already converted their forex mortgages into forint mortgages under the agreement.

The MNB shall provide instruments elaborated in collaboration with the banks for the closing of forex positions opened in the course of the conversions, according to the agreement. Banks will also undertake to repay their short-term external funds in the course of the conversion.

Delinquent borrowers must submit a declaration by March 15, 2012 that the reason for their payment default was a "verifiable and substantial deterioration in...financial standing" in order to avail of the 25% cancellation of their debt.

The agreement tweaks a programme launched earlier that allows repayment of forex mortgages at fixed rates - with the difference between market rates going onto a "buffer account" - and extends it until the end of 2016.

Under the growth pact, outlined in the minutes of understanding, the bank levy will remain unchanged in 2012, but will be halved in 2013. In 2014, any bank levy will not be higher than "the bank tax defined by the legal framework of the European Union, or the average of the bases and the rates of bank taxes in effect in Member States".

The pact contains a promise by the government to neither submit nor support regulation on current forex portfolios to Parliament without consulting the banking association.

The government and banks agree in the pact to start talks on cooperation in Q1 2012. Talks on "the situation of the economy and the role played by the financial intermediary system in the fostering of economic growth" are to follow on a quarterly basis.

Banks must produce a proposal for their role in economic growth by the end of January 2012 and reach an agreement with the government on this role by the end of February 2012.

Banks whose portfolio of corporate loans to microbusinesses and SMEs grows by September 30, 2012 may deduct the increase from the base for their 2012 bank levy. Banks may also deduct from the bank levy base for 2012 the sum of new mortgage loans for residential property granted to retail clients as well as the amount of loans granted to for EU-supported projects that exceed the combined co-financing and pre-financing of the investments. However, the total sum of the deductions from the bank levy shall not exceed 30% of the tax.

The government reiterated in the document its commitment to putting Hungary’s economy on the growth path and acknowledged the "indispensable role of the banking sector in fostering and sustaining growth".