Hungary's debt-relief plan could hurt economy, say analysts

Controversial new plans to make Hungary's banks bear the burden of surging mortgage repayments could drag down economic growth and may prompt some beleaguered lenders to leave the country, analysts say.

Around a million Hungarians have been left with skyrocketing repayments on foreign-currency loans taken out before the onset of the financial crisis as the national currency has slumped.

Those loans were originally cheaper than forint-denominated debt, but as the currency has weakened it has made repaying them more expensive.

Prime Minister Viktor Orban, re-elected in April on a populist platform, has repeatedly tried to shift the loan burden onto the banking sector, which he accuses of enticing consumers with overly attractive loans.

Under a new law, lenders will have to refund past fee and interest rate hikes on the loans. Another proposal calls for the debt to be converted into forints to make it easier to pay back.

Laszlo Geza Tilk, head of the Currency Debtors Advocacy Association, a group helping borrowers to sue the banks, argues the government's plans do not go far enough.

"Social justice requires banks to suffer," he told AFP, arguing that loans should be annulled and turned into forint-based agreements.

But commentators warn the plans could hold back growth in Hungary, which has twice fallen into recession in the past five years as households have struggled to meet soaring loan repayments.

The forint, already one of the worst-performing emerging market currencies this year, has slumped since the plan was announced and earlier this month hit a 30-month-low against the euro.

The draconian measures will also take a heavy toll on Hungary's already battered banking sector, which has suffered under previous government policies and lost millions of dollars in 2011, and could even prompt some banks to pull out, analysts warn.

- 'Zombie banking sector' -

The debt relief plan will "created a zombie-like banking sector that is just trying to survive," said Andras Vertes of the Budapest-based research institute GKI Gazdasagkutato.

Orban has often railed against foreign investors and Hungary's mostly foreign-owned banks, including UniCredit, Erste Group and Intesa SanPaolo, which control much of the industry.

The firebrand politician's populist economic policies -- including "special taxes" on energy and retail and the nationalisation of private pension funds -- have also strained relations with the EU.

EU institutions, including the European Central Bank, have often accused Orban's government of eroding the independence of Hungary's central bank, judiciary and other institutions.

The ECB earlier this month warned of "significant adverse financial impact on the banking system (and) the possibility of negative effects on the Hungarian economy" because of the new banking law.

Hungary's central bank estimates that repaying the fee and interest rate hikes will cost banks around 700-900 billion forints (2.2-2.9 billion euros, $3.0-4.0 billion).

Moody's ratings agency puts the figure at around 2.6. billion euros.

"This will be another drag on the banking sector. It increases the cost of doing banking business in Hungary again," Timothy Ash, an economist at London's Standard Bank, told AFP.

- Drag on growth -

Converting the debt to forints could add another 2.4 billion euros in losses, which would have a "hugely detrimental impact on the banking sector," Phoenix Kalen, a London-based strategist at Societe Generale, told AFP.

She predicts the losses could prompt some foreign banks -- most likely the Austrian or Italian ones -- to leave the country, while "the draconian environment" will also deter future foreign investors.

Austria's Erste Bank forecasts it will lose 93 billion forints due to the new legislation. Last month it posted its heaviest quarterly loss since 2011, dragged down in part by Hungary's stiffer banking rules.

Austria's Raiffeisen and Belgium's KBC have also said they are bracing themselves for heavy losses.

"The question still is what regulatory challenges lie around the corner," said Ash. "Banks will be slow to increase assets in Hungary, they will remain cautious about the policy environment."

The latest scheme will also have dire consequences for Hungary's economy, analysts say.

Economy Minister Mihaly Varga on Monday hiked the government's 2014 growth forecast to 3.1 percent, up from 2.3 percent, citing a pick up in domestic demand and improved output.

But Ash warned the economy is likely to slow because of the new policy as "the banking sector will continue to act as a drag on broader growth and development".

One major worry is the possible impact of converting the debt into forints. Details about the new plan, expected to be put to parliament next month, have not yet been released.

While a below-market exchange rate will help borrowers, it could also create a hole in the sector: "A 20-percent benefit for borrowers would wipe out 2.4 billion euros worth of banking sector capital," Kalen warned.