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Hungary’s banks given time before next shockwave

Issues

From the Budapest Business Journal print edition: The Constitutional Court has given the government the legal means to tinker with foreign currency mortgage contracts, something that traditionally doesn’t bode well for the banking sector. It has been given a little breathing space, however, with Fidesz deciding to put the matter off until after the general election.

The Constitutional Court has finally reached a verdict on the matter of foreign currency denominated mortgage loans and essentially delivered the outcome desired by the government. The panel decided that there are conditions when the state is within its rights to make changes to long-term private contracts.

The jurors evaluated two queries filed by the government to determine the legality of foreign currency lending and whether the terms of the contracts can be changed. The decision states that it is not the Constitutional Court’s jurisdiction to rule on the constitutionality of policies.

However, in the other matter it did give the state some allowances. According to the decision, if conditions have greatly changed from the time of signing the contract, there is a serious social impact to consider and modifications can be made so that they don’t cause either contracting party an unfair disadvantage, changing the contract is possible.

This was in line with the government’s expectations, who now claims it has legal backing for completely phasing out foreign currency based mortgage loans for home purchases. However, there won’t be immediate action, with the matter surely being off the agenda until after the April general elections.

No need to rush
Representative of the governing Fidesz party Gergely Gulyás told reporters that if his party is reelected, in line with all the polling projections, it will first wait for other legal bodies to finalize their take on the matter. The European Court of Justice is currently closing in on a final resolution on a case on forex lending, which will then serve as the basis for Hungary’s top court, the Kúria to formalize its own verdict on the issue.

Only once that has happened can the government take further steps, Gulyás said. The cabinet expects the legal procedure to be concluded in the spring, after which Fidesz would be ready to submit a bill to Parliament in four weeks. Gulyás said this could happen in May the soonest.

When asked, Gulyás didn’t wish to discuss the specifics of the government’s planned legal remedy to the forex case, but hinted that the early-repayment measure launched in 2011, the “végtörlesztés,”is an indication of the lines of thinking in the cabinet. Gulyás also stressed that, as before, the brunt of the related burdens will have to be shouldered by the banks.

No need to panic
However, the banks may not have to worry as much about the new situation as the government rhetoric would indicate. Most importantly, the constitutional jurors stated that any amendment to existing contracts could only come if no single contracting side is unfairly disadvantaged. Stipulating that the banks bear the costs means they could challenge any such measures on constitutional grounds.

The Banking Association also said that the Constitutional Court hasn’t created a new situation with the ruling, since the Kúria’s earlier verdict that reaffirmed foreign currency-based contracts as valid still stands.

“The ruling puts the government in a stronger position for dealing with the banks, but because of the collapse in discussions last year the government is likely to proceed with only token talks with banks to show they are considering their positions,” Nomura analyst Peter Attard Montalto said.  

In the meanwhile, the banks received another reminder that the state is keeping its eyes on their activities and that the regulator, the central bank led by former economy minister György Matolcsy, is ready to occasionally reaffirm the status quo.

As such, 35 out of 35 banks and savings reserves covered in an audit campaign were reprimanded for illegal pricing practices. They are to pay a total of HUF 1.2 billion, while 33 are also held to repaying the unfairly calculated charges to their customers.

Altercations between financial firms and the state are thus set to continue, with several of the fined banks expressing their outrage over the decision and promising to challenge the fine in court.

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