The name and logo of the Hungarian National Bank (Magyar Nemzeti Bank) adorn the main entrance of the bank headquarters in downtown Budapest.(ATTILA KISBENEDEK/AFP/Getty Images)
Summary
Before the end of the year, Budapest will approve new measures to try to help households repay their foreign-denominated loans. In the coming weeks, the debate will revolve around exactly what to do and how to distribute the costs.
Analysis
The Hungarian government's efforts to relieve households struggling to repay their foreign-denominated loans saw a new chapter June 24, when Economy Minister Mihaly Varga said the government would present a "clear and straightforward solution" before the year ends. This comes after the Hungarian Constitutional Court determined that banks should have offered detailed information about the risk when offering those loans and cannot unilaterally change the terms of the loans.
Before the European crisis, foreign-denominated loans, mostly in Swiss francs but also in euros, were popular among Hungarian households. But the devaluation of the forint made it increasingly difficult for Hungarian households to pay back their foreign-denominated loans. Starting in 2011, Budapest took several steps to help households repay these loans. The main measure was the introduction of a lower exchange rate. This triggered criticism by Hungarian banks, which were forced to absorb the losses. Several major foreign-owned banks have been posting heavy losses for years, and these losses have hurt domestic lending, particularly to households.
Budapest's plan temporarily contained the problem somewhat, but the Hungarian central bank recently warned that after stabilizing in 2012, nonperforming loans grew again over the past year. The bank said this rise can be partly attributed to a large number of households holding back payments in expectation of more assistance from the Hungarian government.
In its May report, the Hungarian central bank urged Budapest to resolve the issue of foreign currency debtors. According to the bank, any resolution should include both nonperforming and performing foreign currency debtors, as "intervention for only nonperforming debtors would undermine willingness to pay and benefit those who had stopped servicing their loans, despite being solvent."
In November, Stratfor wrote that the Hungarian government was waiting for a ruling by the Constitutional Court on the legality of foreign-denominated loans in order to have a strong legal basis for taking additional measures on the issue. The ruling was released June 16 and established that while exposing customers to foreign-exchange risk was not unfair in itself, banks should have offered detailed information about the risk when offering those loans. The ruling also said unilateral modifications in foreign-denominated loans are unfair if the conditions of modification were not specifically defined in the contract. The Hungarian Banking Association called the court's decision "unfair" but accepted it, saying it was willing to discuss new legislation with the government.
The Hungarian government will use this ruling to provide additional relief to foreign-denominated loan holders. Lawmakers from the ruling Fidesz party are currently proposing a two-step process. During the first stage, the government would force banks to compensate customers with foreign-denominated loans for unfair practices, such as unilateral changes in contracts. According to a report by Moody's, banks' compensation payments to customers could amount to around 1 billion euros ($1.36 billion) in total, which represents roughly 11 percent of the banking system's total capital.
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In the second stage, all foreign-denominated loans would be phased out from the market. More than half of the outstanding household loans in Hungary are denominated in foreign currency, and of those more than one-fifth are considered nonperforming. According to the latest report by the Hungarian central bank, banks in the country have some $3.6 billion in foreign-denominated nonperforming loans.
Part of a Strategy
The specifics of the upcoming measures are still unclear; Hungarian officials are still analyzing them and negotiating with banks. Several issues will need to be resolved, including the rate at which the foreign-denominated loans would be converted and over what time period. It is also unclear whether the Hungarian government would help the banks carry some of the burden. Over the past few years, Fidesz has approved policies that have hurt Hungarian banks, but the government is not interested in seeing the whole sector collapse. Budapest will try to find a delicate balance between its push against foreign banks and the need to keep the banking sector alive. These negotiations probably will linger through the coming months, and a legislative package is likely to be approved after parliamentary activity resumes in September.
Budapest's moves against the banking sector are part of a strategy to keep its popular support while applying punitive measures on banks. Most banks operating in Hungary are foreign-owned, and Budapest is trying to make their operations progressively harder to sustain so that some lenders eventually leave the country and sell their operations to Fidesz-related investors. This is also in line with the government's plan to expand its participation in economic matters; other sectors such as utilities and the media have also been under economic pressure from the government.
Hungary's most controversial policies -- the nationalization of private pensions, the attempted undermining of the judiciary and the ongoing nationalization of strategic energy assets -- are meant to give the state more power. At a time when the political environment in the region is changing, the Hungarian government believes that centralizing power will boost its domestic position and improve Budapest's prospects for dealing with a weakening European Union, a more assertive Russia and a transforming Central Europe.
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