Hungary: Orban undercuts foreign-currency mortgages
PM forces repayment discounts; 1 million borrowers eligible
"We have a solution at the ready that we can pull out of the drawer in case our current decision is banned by the international court. We will continue our struggle against the banks until we prevail"
Hungary’s prime minister Viktor Orban has sparked controversy again. The country passed a new bill in September allowing early repayment of foreign-currency mortgages at government-specified discounts. Critics claim the move will undermine already weakened investor confidence. The plan will give households the opportunity to clear an estimated total of Ft5.5 trillion ($26 billion) in outstanding foreign-currency-denominated mortgages in one-off payments at fixed rates of Ft180 to the Swiss franc, Ft250 to the euro and Ft2 to the yen. These rates were around 20% lower than market forint crosses as Euromoney went to press.
To participate borrowers must apply by December 30. Contracts made at exchange rates above the fixed levels are excluded. Yet almost 1 million borrowers are still eligible. Meanwhile, banks still reeling from a new profit tax levied on the sector in December will be forced to swallow all the associated losses.
"[The law] is in contravention of all expectations an investor may have in a functioning market economy and democracy," Austrian finance minister Maria Fekter said in a letter to Hungary’s economy minister Gyorgy Matolcsy. The Austrian government later said it was considering legal action to protect its banks’ interests. Austrian banks have approximately €6 billion in foreign-currency loans to Hungarian households.
The Hungarian Banking Association said it thought the plan was unconstitutional. "Banks will turn to the Constitutional Court and the competent institutions of the European Union," the association said in a statement.
The exposed banks include local units of Austria’s Erste and Raiffeisen, in addition to Italy’s UniCredit and Intesa Sanpaolo, and local units of Germany’s Bayerische Landesbank and Belgium’s KBC.
UniCredit said it would stay in the market but the scheme might force it to shelve expansion plans. Raiffeisen chief executive Walter Rothensteiner told Austrian newspaper Wirtschaftsblatt that it was "a very, very serious mistake". Rothensteiner nevertheless said his bank did not enter markets to pull out at the first sign of trouble.
Gyorgy Kovacs, an economist at UBS in London, says the end effect of the scheme will depend on the take-up rate. In private Hungarian officials have tried to downplay its impact. In a leaked letter to his Austrian counterpart, finance minister Matolcsy wrote that only 10% of the eligible borrowers – about 100,000 people – would take advantage of the scheme.
But Orban has suggested that about 300,000 borrowers might avail themselves of a once-in-a-lifetime chance to clear their debts on the cheap. Central bank National Bank of Hungary thinks 20% of those eligible will take the option. The bank also stressed that the scheme carried systemic risks.
"There is a risk that the programme will cause a major setback in the domestic banking sector’s ability to lend, and companies’ reduced access to bank credit might lead to a further deterioration in the outlook for Hungarian growth," the central bank said. The central bank also cut its GDP growth forecast for 2012 from 1.5% to 1%.
PM vows to fight on
Late last year Orban’s Fidesz party oversaw what some say was an all-but-in-name nationalization of the private pension system. Fidesz also imposed special taxes on the mostly foreign-owned Hungarian banks, telecoms, utilities providers and retailers.
Such antagonistic policies have not gone unnoticed. The Council of Europe stated it would follow Hungary’s lawmaking process to see if European Union rules were being violated.
Last month, the German Chamber of Commerce in Hungary said economic credibility was being undermined and the security of contracts endangered. "This worries not only the affected sectors, but sooner or later manufacturers also," said chamber spokesman Dirk Wolfer. Around 25% of all foreign direct investment in Hungary is German.
The extra revenues from the special taxes have plugged holes in Hungary’s government budget. But structural reform has yet to be taken on. In the same week the mortgage repayment plan was announced, the government said it would increase the value-added tax rate to 27%, the highest rate in the EU.
Standard & Poor’s, which rates Hungary’s debt one notch above junk with a negative outlook, said it is monitoring the loan plan.
UBS’s Kovacs thinks a downgrade is unlikely unless the rating agency felt the low-growth scenario was reason alone. The fiscal deficit is on track to stay under 3% of GDP next year, while the current account is in surplus.
"It illustrates the duality of the economic situation in Hungary," says Kovacs. "For bond investors [the market] could still be attractive due to the government’s commitment to fiscal consolidation. The only debate here is over the composition of measures. For equity investors Hungary’s recovery and growth now seem to be entirely driven by external demand."
Even if privately some members of Orban’s party might concede that the mortgage plan’s legality is questionable, the prime minister appears determined to see it through. "We have a solution at the ready that we can pull out of the drawer in case our current decision is banned by the international court," he said in an interview with the Budapest edition of the free news sheet Metro. "We will continue our struggle against the banks until we prevail."