Banks versus the Hungarian government

Today was the last day for the legislators to get together before the summer recess. They marked the occasion by voting for a piece of legislation that is supposed to ease the hardship of those who took out loans in foreign currencies. Nobody seems to be satisfied with the result, with the exception of Hungary’s prime minister, Viktor Orbán, who announced that “this was a historic day that may be the start of a new era…. The era of fair banks may follow.” The debtors find the assistance insufficient. The banks consider it unfair and unconstitutional. And the Hungarian currency, the forint, has been ailing as more and more details of the proposed legislation have become known.

The loss the banks in Hungary face is at least $4 billion according to the estimates of Hungary’s central bank. Today OTP, Hungary’s largest lender, said it may have to refund borrowers $644 million, most of that sum due to the charge that banks were not transparent about unilateral changes to loan terms such as interest rate hikes and a smaller amount linked to exchange-rate margins. And this may not be the end of the banks’ troubles. Antal Rogán, whip of the Fidesz caucus, indicated that later in the year the government plans to force the banks to convert their forex loans to loans denominated in forints at a below-market exchange rate. That could cost the lending institutions an additional $16 billion.

The stock price of  OTP dropped as much as 4% during the course of the day, closing down 1.7% on the day and 4.1% on the week. The share price of Austrian Erste Group Bank AG, the second biggest lender in the country, plunged 16% after it was revealed that its loss in 2014 might be as large as 1.6 billion euros ($2.2 billion) because of its poor performance in Hungary and Romania.

London-based analysts see trouble ahead.  Peter Attard Montalto, an economist at Nomura International, thinks the market “is underestimating the disruptive impact the proposed path will have on the banks in the short to medium run.”

The forex loan legislation passed with an overwhelming majority. There was only one dissenting vote and two abstentions. The former came from Gábor Fodor, the sole MP of the Hungarian Liberal Party, and the two abstentions from DK members. Fodor argues that the legislation “will cause serious economic troubles.” He is also convinced that the Supreme Court’s (Kúria) decision regarding the currency bid/ask spread and the practice of unilateral changes in contracts is unconstitutional. In addition, there is the problem of the statute of limitations, which the bill retroactively changed in a bizarre way. The clock will start counting down only after the loan has been paid in full.

Naturally, the Banking Association (Bankszövetség) is up in arms. Taking advantage of the currency spread is an internationally accepted practice which covers the real cost to the banks. Like Fodor, the secretary of the association, Levente Kovács, considers the change in the statute of limitations unacceptable. He also objects to other retroactive changes incorporated into the legislation as “they violate the rule of law and cause uncertainty among investors.” He pointed out that the banking sector is one of the largest taxpayers in the country. The banks pay 220 billion forints yearly in taxes, and that does not include the extra tax levies they had to suffer in the last three years. The extra levies themselves amount to 1 trillion forints, which translates into 2 million forints per forex debtor. He predicted serious losses and, as a result, forced consolidation in the sector.

Everybody suspects that the banks will go to court over the issue of unilateral contract changes. It is also almost certain that there will be court battles over the legality of converting foreign currency loans into forint loans at below-market rates.

All this made no impression on Fidesz legislators. Antal Rogán claimed after the vote that parliament had at last meted out justice for the debtors and promised that within a few months all unfairly collected charges would be refunded. According to Rogán, the average debt holder may receive a refund of between 600,000 and 1 million forints before the end of the year.

This promised windfall did not satisfy those foreign exchange debt holders who had earlier organized several groups to battle for their “rights.” One of these groups, Otthonvédelmi Tanács (Council of Home Defense), demonstrated in front of the parliament building this afternoon. Figuring that an average loan is 7 million forints, they now demand 5.9 million back because in their estimation that 7 million forint debt has since doubled. They claim that the bill just passed will decrease their debt by only 1.2 million, which is not enough. They charged the banks with fraud, and some of the signs demanded jail sentences for bank managers.

Those who predicted court battles did not need to wait long. OTP shortly after the passing of the bill announced its decision to sue the government. And this is just the beginning.