A new law allows debtors to repay their debts in a lump sum, ahead of schedule, at fixed rates of Ft180 to the Swiss franc, Ft250 to the euro and Ft200 to Y100. These are far below market rates or those which would apply under the prevailing contracts. The resulting losses will have to be borne by the banks.
One of the most serious problems facing the Hungarian economy is that approximately Ft5,000 billion ($23 billion) of mortgage loans - 40% of all such loans - are denominated in a foreign currency. Two-thirds of the problem debts are in Swiss francs. The substantial weakening of the forint against the Swiss franc has had grave consequences. People who have been servicing their debts for years, paying ever-increasing instalments, today owe more than their initial debt. There are growing numbers of defaults and the value of debtors' collateral - mainly their homes and cars - has fallen significantly.
The government has tried a series of measures to deal with the problem. As well as a prohibition against creating mortgages to secure foreign currency debts, it has introduced a moratorium on mortgage enforcement and provided the option of delaying payments on debt increases arising as a consequence of the forint's fall in value (for further details please see "Will government's home protection plan rescue borrowers?" and "Moratorium on eviction of defaulters: salvation or danger?").
The idea for the new measure became public after a meeting of the ruling coalition on September 9 2011, and became law with extraordinary speed. The prime minister confirmed the plan in a speech to Parliament on September 12; a bill was submitted to Parliament on September 16 and was passed a few days later.
The prime minister has presented the bill as evidence that the government is on the side of the people and against the banks, which cheated their customers into bearing unfair risks and losses while the banks collected the profits.
The plan as originally announced sought to help approximately 300,000 people, slightly less than one-third of the debtors affected. This would have resulted in an immediate loss to Hungary's banks of almost Ft400 billion ($1.88 billion) on the principal amount of the outstanding debt assets. The act as passed by Parliament limits the availability of this option, so that according to current estimates, no more than 100,000 debtors will be able to take advantage of it.
Debtors are entitled to early repayment if their contracts have not yet been terminated and if the initial exchange rate was lower than the new fixed rates. Repayment may be offered before the end of 2011 and must be made within 60 days. The initial plan was that banks would be required to provide forint loans to finance prepayments, but the government has abandoned this proposal.
The limitations mean that debtors are excluded from the scheme if they are not creditworthy, either because they have already defaulted or because the value of their collateral is low and they cannot call on the cash necessary for early repayment within the limited period. A further restriction relates to the capacity of the banks to deal with repayments and requests for new loans. Debtors may not sell their properties in order to take advantage of this opportunity; moreover, banks will be unable to establish the value of the properties offered as collateral and to process the thousands of requests that they receive from customers. Thus, there is a danger that this measure will benefit only those who are least in need of help.
The new measure has been widely criticised on both economic and legal grounds. The Hungarian Banking Association described the plan as a "significant threat" to the financial system, arguing that it may further harm growth and public finances. The Hungarian Central Bank stated:
"[The programme is] a significant source of uncertainty in terms of Hungary's risk perceptions. There is a risk that [it] will cause a major setback in the domestic banking sector's ability to lend, and companies' reduced access to bank credit may lead to a further deterioration in the outlook for Hungarian growth."
Several former finance ministers and leading economists have also spoken out against the plan.
Hungary's banks are particularly resentful of the measure. They have been burdened with a specific tax for five years, which was significantly increased in 2010. They consider that they have already provided the necessary resources for the government to deal with the problem, but that this money has been spent for other, unrelated purposes.
Legal criticisms of the measure are based on the view that it violates basic principles of Hungarian and EU constitutional law: the right to property, the rule of law, the prohibition against retroactive legislation, the requirement of legal certainty, freedom of contract and private autonomy. The Hungarian Banking Association, which asked the president to submit the bill to the Constitutional Court for review before signing it into law, has announced that it will submit the matter to the court and to the EU authorities. Some banks have stated that they will seek legal remedies.
Bankers have also pointed out the potential damage done by legal uncertainties, frequent changes in the law, allegations against banks, the calling into question of the legality of hundreds of thousands of contracts and the making of political promises to rescue debtors. These factors, they argue, weaken the binding force of contracts and makes debtors less willing to honour their contractual obligations.
The government appears to be in a no-win situation. If the programme succeeds, the banks will be badly hurt and will take legal measures to fight it. However, if the plan's built-in limitations mean that relatively few debtors take advantage of it, the initial problem will remain, which will represent a significant failure for the government.
For further information on this topic please contact István Gárdos at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email ([email protected]).