Hungary: FX loan legislation incentivizing banks to release debts

07 November 2013 | newsletters

The Hungarian Parliament on Tuesday approved legislation that lifts most restrictions for participation in an exchange rate cap scheme for borrowers with foreign currency-denominated loans.

A last-minute amendment to legislation aims to bail out individual debtors with FX loans by incentivizing banks to partly release their debts. The legislation adopted by the Hungarian Parliament on 5 November 2013 eases the restrictions for participating in the so-called exchange rate cap scheme. Under the scheme, the exchange rate is fixed at a predetermined rate in order to avoid the adverse effects of exchange rate volatility on the debtors. The amount resulting from the disparity between the fixed rate and the market exchange rate is registered on a separate credit account and its repayment is deferred. The Hungarian State guarantees such deferred payment.

Pursuant to the amendment submitted shortly before the vote, the Hungarian State would only provide such guarantee if the principal amount of the FX loan does not exceed 95% of the value of the encumbered real property. So, banks would be incentivized to release the debt to the extent that the principal amount meets the threshold. The rationale behind this is that the banks' loss on the release of debt may be balanced by such guarantee provided by the state. However, according to experts' expectations, such release may erode debtors' repayment discipline, which would cause further losses to the banks. For this reason, experts believe that banks will not be willing to (partly) release the debts despite this new incentive.