The Kúria, Hungary’s supreme court, ruled on Monday that some aspects of contracts for loans denominated in foreign currency were unfair. Shares of OTP Bank rose after the decision.
The risk that borrowers in foreign currency assumed can only be seen as unfair if they were not put in a position to credibly assess the extent of fluctuations in the exchange rate, the Kúria ruled. The court found, however, that the exchange rate spread applied by banks – the difference between the rate when the loan was disbursed and repaid – was unfair. The ruling does not apply retroactively but is guidance to courts in future cases.
Kúria official György Wellmann said the most important aspect of the court’s legal uniformity decisions applied to banks that change contracts unilaterally. This is acceptable only under such strict conditions that very few of the contracts will satisfy under the court’s ruling. The conditions include clear phrasing, the opportunity to cancel the contract and the rights of both parties to the contract to make changes.
Shares of Hungary’s biggest lender, OTP Bank, strengthened and the forint firmed after the Kúria ruling (see box).
Opposition parties said that it was now down to the government to act on the issue of foreign exchange debtors.
Rogán: banks should reimburse unfairly treated FX debtors
The parliamentary group leader of the ruling Fidesz party, Antal Rogán, said a bill will now be prepared to ensure that banks reimburse forex debtors in full.
Rogán said the ruling grants authorisation to the government and to Parliament to “do justice to debtors to whom the banks had caused losses”. He said “hundreds of thousands” of debtors could individually sue their banks but now “it is not up to lawyers but Parliament to recover the money”.
It has been proven that hard currency-denominated loans are a faulty product, and the bill should also aim to eliminate such loans, Rogán said. It should provide a final solution to 180,000 debtors that had joined the government’s exchange rate cap scheme, too.
Fidesz is expected to submit the bill at the start of Parliament’s autumn session.
Banks: “unfair” decision
The Banking Association called the decision “unfair” but said that it accepted the ruling. Levente Kovács, the association’s general secretary, insisted that including an exchange rate spread in foreign currency-denominated loan agreements was justified, and served to finance the “considerable cost of covering hard currency positions”.
Kovács said a “fair, viable and final” solution should be found to the problem of forex debtors, but added that that solution should not “pose an unbearable burden to banks”.
Analysts: too soon to tell
It is too early to calculate the burden the legal uniformity decision on FX loans would place on banks, analysts told state news agency MTI, adding that now it is the government’s turn to react.
Declaring the exchange rate margin banks used at FX loan calculations unfair, the legal conformity decision mirrors the Kúria’s ruling taken in an individual case one week earlier, Ákos Kuti of Equilor Befektetési said. As opposed to the above decision, the Kúria on Monday had not taken a stand that would automatically affect all contracts with regard to two matters – the exchange rate risk and unilateral contract amendments.
Zoltán Réczei of Buda-Cash Brókerház agreed, noting that the Kúria did not declare unilateral contract amendments unfair, which could even be favourable to banks. It is now up to the government to amend legislation affecting the conditions of contracts, thereby preventing a flood of court cases, Réczei said, noting that such rules can likely be adopted only for future contracts.
The decision on the exchange rate margin, on the other hand, if applied retroactively to the amount disbursed and to instalment payments, could result in HUF 80-100 billion losses to the banking system as a whole, he said.
OTP shares, forint strengthen
Shares of Hungary’s biggest lender, OTP Bank, strengthened on Monday after the Kúria announced its ruling on FX loans. Shortly before 1pm the shares were trading at HUF 4,440 and ten minutes later they stood at HUF 4,540. The forint strengthened to trade at 306.92 from 307.75 in the morning against the euro just after the announcement. It eased back to 307.50 around 7pm.