Orbán Government Measures to Reduce Household Foreign-Currency Debt

Summary 

Swiss francs

Faces that have come back to haunt.

The Orbán government has taken several steps since it came to power in May 2010 to help Hungarians repay the enormous amount of Swiss franc- and euro-denominated loans they took out beginning in 2004–2005 and to prevent them from losing houses purchased using such loans.

First, in 2011 the Orbán government came to an agreement with the Hungarian Bank Association (Magyar Bankszövetség)—the organization that represents banks in Hungary—to allow foreign-currency (FX) borrowers to repay either installments or the entire sum of their retail loans at fixed Swiss franc and euro exchange-rates that were significantly lower than the market rates.

Second, the government imposed a moratorium on evictions and established the National Asset Manager to help borrowers who could not repay their FX home loans to either remain in their houses or to find new housing.

Third, in July 2014 the National Assembly adopted a law in 2014 pursuant to a decision from the Curia (Kúria), Hungary’s Supreme Court, that compels banks to reimburse household borrowers for increases in repayments on Swiss franc- and euro-denominated loans resulting from unilateral hikes in the interest rate on such loans and the use of bank-specified buy and sell rates rather than the official National Bank of Hungary rate in calculation of disbursement and repayment of them.

Fourth, in November 2014 the National Assembly passed legislation that compelled banks to convert Swiss franc- and euro-denominated household loans into forints.

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Background

Bern, Switzerland

The Swiss National Bank.

Banks began offering borrowers loans, predominantly home loans, denominated in Swiss francs and euros rather than forints primarily because the central-bank-stipulated interest rates on these foreign currencies was lower than the interest rate on the forint.

The Swiss National Bank’s base rate, for example, fluctuated between 0.5 percent and 2.75 percent between September 2005 and January 2009, while the National Bank of Hungary’s base rate fluctuated between 6 percent and 11.5 percent during this period (source A and B in English).

Moreover, prior to the global financial and economic crisis in 2008, Hungary expected to introduce the euro in place of the more volatile forint as the national currency at date in the not-too-distant future.

When the FideszChristian Democratic People’s Party alliance came to power in the middle of 2010, a total of 76.6 percent of all household loans in Hungary were therefore denominated in Swiss francs and euros and only 23.4 percent in forints. A total of 84.2 percent of all foreign-currency (FX) household loans in Hungary were denominated in Swiss francs and 15.8 percent in euros (sources in English: see “Financial Stability Statistics” and “Money and Capital Markets”).

However, Hungarian borrowers had increasing difficulty making repayments on these loans following the drastic weakening of the Hungarian forint to the Swiss franc and the euro following the onset of the global financial and economic crisis.

The forint, for example, weakened from an average rate of 146.57 to the Swiss franc in the third quarter of 2008 to 211.81 to the Swiss franc in the third quarter of 2010 (source in English: see “Exchange Rates”).  Therefore, the cost of repaying installments on Swiss franc-denominated loans in forints rose 44.5 percent over this period.

Hungary was, moreover, compelled to at least temporarily abandon the notion of adopting the euro amid the volatility and uncertainty surrounding the financial and economic crisis.

Primarily as a result of the weakening of the forint, Hungarians were having trouble making repayments on slightly over one-fifth of the total amount of their FX loans when Fidesz returned to power in 2010 (source in English). 

Hungary’s Household FX Debt Crisis in Numbers

The Orbán government faced the following household foreign-currency debt crisis in May 2010 (source in English): 

Total household foreign-currency debt in Hungary: 5.71 trillion forints;

Total household foreign-currency debt classified as problematic: 1.19 trillion forints;

Population of Hungary (January 1, 2010): 10,014,324;

Per capita household foreign-currency debt: 570,024 forints;

Average gross monthly wage: 202,770 forints.

To verify above calculation of total household foreign-currency debt: open National Bank of Hungary Excel table Composition of loans extended to the household sector; add gross total debt from items 1.3 (housing), 1.5 (home equity), 1.7 (personal) and 1.9 (vehicle) for the time period 2010.06. To verify the above calculation of total household foreign-currency debt classified as problematic: subtract the total stock of debt classified as problem-free in each of these tables from the gross total debt and add them together.

Fixing the Exchange Rates 

On May 30, 2011, the Orbán government came to an agreement with the Hungarian Bank Association permitting household borrowers to repay installments on Swiss franc-denominated loans at fixed exchange rates of 180 forints to the Swiss franc (compared to a market rate of 220 on that date) and 250 forints to the euro (compared to a market rate of 268 on that date).

According to the original agreement, the borrowers would then repay the difference in the fixed rate and the actual market rate for these currencies in forints following the expiration of this three-year period. However, the National Assembly voted on May 28, 2013 to make the fixed-rate repayment plan permanent. 

On December 15, 2011 the Orbán government and the Hungarian Bank Association concluded an agreement allowing borrowers to repay the entire sum of their Swiss franc- and euro-denominated loans at these fixed rates by March 1, 2012. Banks would then be permitted to deduct one-third of the exchange-rate losses stemming from this agreement from their payment of the government’s financial-sector tax in 2012.

A total of 169,256 Hungarians repaid 1.35 trillion forints in Swiss franc- and euro-denominated loans in their entirety pursuant to the so-called “final-repayment” (végtörlesztés) agreement, amounting to 24.1 percent of the stock of all loans denominated in these currencies (source in Hungarian).

Moratorium on Evictions 

Társadalom - Két roma családot lakoltattak ki Hódmezõvásárhelyen

Police evict resident from his home in Hungary.

The Orbán government preserved the three-month, cold-season moratorium on foreclosure and eviction beginning each year on December 1 introduced at the time of the previous Hungarian Socialist Party-led government.

The number of foreclosures and evictions remained relatively small in Hungary during the warm-weather months when the moratorium was no longer in force, numbering around 450 total in 2011 and 2012 (source A and B in Hungarian).

On May 12, 2014, the National Assembly adopted legislation extending the moratorium on foreclosure and eviction for an undetermined period of time until the “permanent resolution of the foreign-currency debt problem” (source in Hungarian).

Gábor Fodor, the single member of the Hungarian Liberal Party in the National Assembly, was the only representative to vote against extending the moratorium, asserting that it encouraged FX borrowers to violate the stipulations of their loan contracts (source in Hungarian).

The National Asset Manager

The May 30, 2011 exchange-rate agreement between the Orbán government and the Hungarian Bank Association also established the state-owned National Asset Manager (Nemzeti Eszközkezelő) to purchase houses repossessed from Swiss franc- and euro-denominated mortgage holders at between 30 percent and 55 percent of their market value and rent them to these borrowers in order to prevent their eviction. The National Asset Manager would also launch a program to build houses for FX borrowers who had defaulted on their loans and lost their homes.

The Ócsa Residential Park

The Ócsa Residential Park.

The Ócsa Residential Park.

In October 2012, the National Asset Manager launched construction of 80 houses in the village of Ócsa, located ten kilometers southeast of Budapest, for borrowers who had been evicted from their homes after defaulting on their FX loans.

According to the Interior Ministry, construction of the 50- and 70-square-meter houses and connected public utilities cost 2.36 billion forints (8.06 million euros). The National Asset Manager accepted only 20 of the 588 applications to move into the houses submitted by the February 15, 2013 deadline, extending the deadline to May 10 of that year.

On January 17, 2014, the newspaper Népszabadság reported that the Orbán government had decided to reclassify the 80 dwellings at the Ócsa Residential Park as emergency housing for people evacuated from disaster zones rather than for those who lost their homes due to default on FX mortgages. The newspaper noted that 38 of the 80 houses still stood empty as of that date (source in Hungarian).

The Government Solicits High Court Opinion on FX Loans

The Curia building in Budapest.

The Curia building in Budapest.

On November 8, 2013, Prime Minister Viktor Orbán said during an interview on state-run Kossuth Radio that Hungary’s supreme court, the Curia, should issue a decision establishing legal uniformity with regard to the lawfulness of foreign-currency-denominated loan contracts (source in Hungarian).

On November 30, 2013, the Orbán government asked Hungary’s Constitutional Court to examine the compatibility of foreign-currency-denominated loans with the Fundamental Law from the perspective of consumer-protection, equitable market competition, abuse of power, human dignity and the democratic rule of law (source A and B in Hungarian).

On December 16, 2013, the Curia issued its decision on the matter, declaring that foreign-currency-denominated loan contracts were legally valid and did not violate moral standards or represent usury. The supreme court proclaimed that borrowers bore the risks of exchange-rate fluctuations affecting the amount of their repayments on FX loans. Fidesz National Assembly officials harshly criticized the Curia’s decision (see Having Your Cake).

On March 17, 2014, Hungary’s Constitutional Court decided that in exceptional instances the government could intervene to modify the conditions of FX loans, though must take the interests of both the bank and the borrower into account when doing so. The court furthermore stated that it is not authorized to take action with regard to specific foreign-currency-denominated loan contracts (source in Hungarian).

However, on June 16, 2014, the Curia declared in a subsequent decision that the unilateral increases banks had made to the interest rates charged on foreign-currency loans and use of their own buy and sell exchange-rates rather than official National Bank of Hungary exchange rates in the calculation of disbursement and repayment of FX loans had been “unfair” (source in Hungarian). 

Compensatating FX Borrowers for Unilateral Interest-Rate Increases and Use of Buy-Sell Rates

On July 4, 2014, the National Assembly approved a Fidesz-sponsored law regarding foreign-currency loans pursuant to the Curia’s decision that two elements of FX loan contracts had been unfair (source in Hungarian).

The legislation requires banks to repay all borrowers—both those with loans in foreign currency and those with loans in forints—for increases in repayment installments that resulted from unilateral interest-rate hikes unless the banks can prove in court that such rises were justified pursuant to the Curia’s June 16 ruling.

The legislation also requires banks to reimburse foreign-currency borrowers for the financial losses they incurred as a result of using their own buy and sell exchange rates rather than the National Bank of Hungary mid-rate to calculate disbursement and repayment of FX loans.

As was the case with regard to the indefinite extension of the moratorium on foreclosure and eviction, Hungarian Liberal Party representative Gábor Fodor was the only member of the National Assembly to vote against the law (source in Hungarian).

Prime Minister Viktor Orbán declared after the adoption of the law “It could easily be that we have opened a new era . . . it could be that the age of fair banks will finally arrive to Hungary” (source in Hungarian).

National Bank of Hungary Deputy Governor Ádám Balog estimated that the law would cost banks in Hungary between 600 billion and 900 billion forints, or approximately 2 billion to 3 billion euros (source in Hungarian).

Banning Foreign-Currency Loans 

Prime Minister Orbán speaking on Kossuth Rádio on July 26, 2013.

Prime Minister Orbán speaking on Kossuth Rádio on July 26, 2013.

The Orbán government banned foreign-currency-denominated loans in Hungary on July 1, 2010.

However, on May 30, 2011, Prime Minister Orbán announced that the government would lift the prohibition on foreign-currency-denominated loans, noting that European Union regulations made such a ban difficult, though would restrict those eligible for FX loans to those who earn an income of at least fifteen times the minimum wage calculated in the foreign currency in which the loan is denominated.

On June 27, 2013, The European Commission launched an infringement procedure against Hungary for this limitation on eligibility for foreign-currency-denominated mortgages on the grounds that it violated the European Union principle of the free movement of capital.

Speaking on Kossuth Radio on July 26, 2013, Prime Minister Viktor Orbán said “The institution of foreign-currency-denominated loans must be removed from the Hungarian financial system,” adding “Now there are such loans. In the future there will not be” (source in Hungarian).

On September 5, 2013, Fidesz National Assembly caucus Chairman Antal Rogán declared that further measures were needed to reduce the debt burden of foreign-currency borrowers, declaring FX loans to be “defective products” (source in Hungarian). 

In an interview with the opposition newspaper Népszabadság published on June 26, 2014, National Economy Minister Mihály Varga said that the government would initiate measures to convert all outstanding Swiss franc- and euro-denominated loans into forints and again ban foreign-currency loans in Hungary before the end of the year (source in Hungarian).

Forintization and the Fair Bank Law

Justice Minister László Trócsányi.

Justice Minister László Trócsányi.

On November 25, 2015, Fidesz-Christian Democratic People’s Party National Assembly representatives adopted two laws submitted by Justice Minister László Trócsányi: one requiring banks to “forintize” most foreign-currency-denominated mortgages; and another, the so-called “Fair Bank Law” requiring financial institutions to provide greater and more explicit detail to borrowers and circumscribing their prerogative to unilaterally raise interest rates (source in Hungarian).

The forintization law required banks to convert all repayment installments on FX mortgages into forints beginning on January 1, 2015 at the official National Bank of Hungary rates registered on November 7, 2014—256.60 for the Swiss franc and 308.97 for the euro. The law provided borrowers who earn a regular income in the foreign currency in which their FX mortgages are denominated and those who would pay higher interest rates on the forintized mortgages than on the original FX mortgages with the option of retaining their foreign-currency-denominated mortgages rather than having them converted into forints (source in Hungarian).

Justice Minister Trócsányi said that the monthly loan repayments of FX mortgage borrowers in Hungary would fall by between 25 and 30 percent as a result of this measure (source in Hungarian).

The Fair Bank Law, which went into effect on February 1, 2015, restricts banks to one unilateral interest-rate hike every three years and five total interest-rate increases on any single loan (source in Hungarian).

 

Last Updated: June 11, 2016. 

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