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Fenced in

The government’s plan for the early repayment of foreign currency mortgages sparked criticism both in Hungary and abroad.  

Hungarian borrowers will have until the end of this year to register for the early repayment of their foreign currency-denominated mortgages at a fixed rate: 180 HUF/CHF, 250 HUF/EUR and 2 HUF/JPY.

Prime Minister Viktor Orbán told HírTV that approximately 150,000-300,000 borrowers have enough savings to repay their loans in a single installment, but this number could be higher adding those who are helped by friends or relatives. He strongly recommends debtors grasp this opportunity, as the Swiss franc is unlikely to weaken to the level at which most borrowers took out their loans. 

Another slap in the face for banks

Planned restrictions

-banks are not obliged to issue new forint loans for those choosing to repay the FX mortgage

-the option will be available only for FX mortgages 

- only those are eligible who took out their loans at rates below 180 HUF/CHF, 250 HUF/EUR or 2 HUF/JPY 

- registration for the program will be open until the end of 2011

According to the FX plan, banks will pay the costs of the difference between market rates and the fixed rate. This is another blow to the Hungarian banking sector, which has already been hit by the extraordinary bank tax. OTP and FHB were suspended from trading on the Budapest Stock Exchange for an entire day waiting for Orbán’s announcement of the plan on September 12.

Some planned restrictions to the scheme could reduce the losses banks would have to face, but the damages for the banking system and the credit market could still reach a few hundred billion forints. The plan does not force banks to offer new forint loans to borrowers, who want to take advantage of the opportunity to pay back their FX loans, because “banks will do so anyway”, Orbán pointed out. 

Hungary’s government will end the “era of bankers” and will stop the practice of making borrowers bear all the losses and risks, Orbán said in an interview with the daily Metropol. “The era of bankers has ruined Europe, and within it, Hungary.” Over the past 15-20 years, banks have made people believe they could borrow without consequences, and that they would always have unlimited access to cheap loans, he added.

Countries such as Romania and Poland protected people from the negative effects of this period, but Hungary’s past leaders had stood by the banks, Orbán said. No solution could be found among the instruments of the era of bankers, thus the government had introduced new tools of its own, such as the moratorium on evictions, a fixed exchange rate for repayments of foreign currency-based loans and an option for early repayment of the loans, the PM explained. 

Orbán pointed out that foreign-owned banks are backed by their parents, while the state stands behind Hungary’s OTP and mortgage bank FHB, if necessary. This does not mean the state wants to take an ownership stake in either bank, he stressed.

The Hungarian Banking Association responded by saying the proposal was “unacceptable for the banking community because it leads to substantial financial, macroeconomic and growth risks”. If the measures are implemented, banks will turn to the Constitutional Court and the relevant authorities of the European Union to seek legal assistance. However, the Association insisted it was still willing to discuss the proposed measures with the government. 

Austrian outrage

The plan drew sharp criticism from leading Austrian officials, little  surprise, given that Austrian banks hold 40% of Hungary’s Swiss franc denominated loans. Austria’s finance minister Maria Fekter was first to react, saying in a letter to Hungarian opposite number György Matolcsy that the plan would generate gigantic and immediate losses in Hungary’s banking sector and jeopardize the financial stability of the entire Central and Eastern European region. The planned measures undermine legal stability to an extent unprecedented in the EU, she claimed. If the proposal is adopted, the equal treatment of Hungarian and foreign banks must be ensured, Fekter stressed.

Austria is reviewing whether the proposal is in line with current regulations, according to Austrian Chancellor Werner Faymann. He said that the Hungarian government was aware of the Austrian banks’ concerns about the plan. Ewald Nowotny, the governor of the National Bank of Austria, said that the country’s government should utilize all possible legal means to block the plan, as it threatens Austrian banks.

The European Commission expressed concerns about the plan, too. While the plan reduces household exposure to the crisis, it could have negative effects on the banking system, Commission spokesman Amadeu Altafaj Tardio said. It is too early to announce a final position on the plan, but the Commission said it is in contact with the Hungarian authorities about the planned measures. The Commission will look at whether the plan is in line with key European Union policies, such as the free movement of capital as well as state aid rules. Banks’ commitments under the “Vienna Initiative”, a crisis management framework established by banks, should also be considered, he added.

The National protection Plan

1. Fight against usury

    - stricter Criminal Code

    - limiting rates on loan agreements by law

    - 30% cap on APR

     - reduction of cash benefits in favor of in-kind subsidies to low-income families

2. Maximized utility prices

extension of regulated prices to garbage collection, water, and sewage fees

3. Act on Stability

to ensure the harmonized operations of the pension, health, tax and municipality systems

4. Home protection plan

 - early repayment option of FX mortgage loans

 - forint-based banking costs to be charged in forints

 - pegging interest rates of FX loans to a transparent reference rate

 - establishment of positive debtors’ lists

  - personal income tax exemption 

5. Financial protection plan

   - continuous reduction of state debt

   - budget deficit under 3%

   - reverse taxation in agriculture

   - 35% VAT on luxury goods

   - strengthening defenses against    economic crime and abuse 

6. Start Program

launch of a test program in 2011, followed by Start programs in the agricultural and energy sectors

 

Plans B and C

The government was not surprised that the plan had come under attack. Orbán said that he took about as many calls from prime ministers and the president of the European Commission as when the government introduced the extraordinary bank levy in 2010. Matolcsy noted that he understood, but did not share, criticism of the government’s FX loan scheme.

Government officials are aware that legislation enacting the scheme will go before the Constitutional Court as well as the European Court. Orbán said in an interview that the government has a plan B and even a plan C if international courts prohibit the scheme, but would not reveal what they are.