Hungary banks, government strike deal on foreign currency loans

Hungary's government and banks signed a long-awaited deal on Thursday to reduce the burden of foreign currency loans on cash-strapped households, which have been hit hard by a fall in the value of the local forint currency. Shares in OTP Bank, central Europe's top independent lender, jumped 6 percent on the deal, which will see the government and banks share costs and also includes a reduction in special taxes paid by banks over the coming years.
The agreement comes after over a year of battles between the centre-right government and Hungary's banks, which are burdened with Europe's highest bank tax and substantial losses due to an earlier scheme which allows foreign currency mortgage holders to repay their loans at well below market rates.
The central European country is struggling with about 5 trillion forints ($21 billion) worth of foreign currency household mortgages, mostly denominated in Swiss francs, which were taken out before the 2008 financial crisis. Repayments on the loans have soared for Hungarians in real terms over the last three years, hurting domestic consumption which contributed to a sharp economic slowdown.
Under the new agreement, announced by Economy Minister Gyorgy Matolcsy on Thursday, banks will undertake to convert foreign currency loans overdue more than 90 days to forint-denominated mortgages, and cancel 25 percent of those debts until May 2012, under certain conditions.
In addition, performing borrowers will be able to join an earlier preferential exchange rate scheme until the end of 2012, which allows them to make repayments on their loans at 180 forints per franc and 250 forints per euro - below market rates - and accumulate the difference on a separate account until the end of 2016. Clients will pay the principal, while banks will pay 50 percent of the accumulated interest rate costs and the state budget the other half.
"The agreement has a 5-year time horizon, and the burden of the state will be 300 billion forints, while the burden of the bank sector 600 billion forints over these five years," Matolcsy said. "This is a big burden for both sides, but this is how much we lift off the shoulders of 1 million families who have foreign currency mortgages."
Matolcsy said the deal would not affect indebted local governments or corporates, but could boost consumption which could help keep economic growth in the positive territory. Analysts expect Hungary's economy to stagnate next year, while the government expects half percent growth.
Under the deal, Hungary will let banks reduce a big special tax payment in 2011 by 30 percent of their losses deriving from a scheme to allow the early repayment of foreign currency mortgages. The deal also contains that the government will cut the special bank tax by half in 2013, and that from 2014 it will apply the bank tax rules of the European Union.
Banks paid an annual almost 190 billion forints in windfall taxes in 2010-2012, which will be halved in 2013. Major banks in Hungary include OTP Bank and the local subsidiaries of Austria's Erste Bank, Raiffeisen Bank , Belgium's KBC and Italy's Intesa SanPaolo.