UPDATE 3-Hungary PM backs new FX plan, Austria cries foul

Mon Sep 12, 2011 12:32pm EDT

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By Gergely Szakacs and Michael Shields

BUDAPEST/VIENNA, Sept 12 (Reuters) - Hungary's prime minister on Monday gave a conditional green light to a plan enabling families to repay foreign currency loans at a big discount to market levels, sparking outrage from neigbouring Austria, home to some of emerging Europe's top lenders.

Orban's remarks helped allay the worst market fears triggered by a Friday proposal of the ruling centre-right Fidesz party, which implied banks might be forced into issuing new forint loans for all borrowers wishing to repay their expensive FX mortgages.

Analysts estimated full conversion of the total outstanding stock of Swiss franc loans -- which proliferated in the central European country of 10 million before the 2008 financial crisis -- could have caused bank losses of up to 1.1 trillion forints ($5.3 billion).

The current proposal would enable borrowers with sufficient savings to repay their foreign currency mortgages in full at 180 forints per Swiss franc and 250 forints per euro, far below current market exchange rates.

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"We propose that on top of the proposal by Fidesz-Christian Democrat (parliamentary group), (lawmakers) should not present any further motions burdening the banking system with regard to the final repayment (of loans)," Orban told parliament.

"This means that apart from the final repayment, they should not prescribe mandatory (loan) conversion into forints or mandatory forint loan issuance, because this will commence anyway," he said.

With these caveats, Orban dubbed the new scheme offered to hundreds of thousands of households holding Swiss franc debt equivalent to 18 percent of Hungary's gross domestic product "feasible", adding that parliament would have the final say.

It was not immediately clear when parliament would vote on the new programme.

The plan is a further blow to banks active in Hungary, which have already been slapped with Europe's highest financial sector tax, and triggered an angry response from Austria, whose banks are among the leading lenders in the EU's emerging eastern wing.

Lenders including UniCredit Bank Austria , Erste Group Bank and Raiffeisen Bank International have roughly 6 billion euros ($8.23 billion) worth of foreign-currency loans outstanding in Hungary, Austrian officials said.

The banks declined to comment, while officials said they were seeking more details on the proposal.

But an Austrian official who asked not to be named said the European Commission was intervening.

"Already over the weekend there have been several attempts to get an idea what (Orban) is planning exactly and to convince him to back down because it could have a major impact on banks and it is not in line with the legislation in the European Union," the official said.

"It is a complete failure to comply with the rules within the Union."

NARROWED SCOPE

It was not clear how many households would join the scheme as few families are likely to have the required amount of cash to settle their outstanding debt in one go.

The plan, which Hungary's central bank has said threatens financial stability, is the latest in a run of unorthodox steps by the government, including a $15 billion pension grab and windfall taxes on banks and other sectors to plug budget holes.

Orban said the government had considered the plan's potential impacts and found that foreign-owned banks active in Hungary were backed by their parents, while Hungary's OTP and rival FHB had access to state backing, if necessary.

"We have found that regardless of this decision, banks continuously reduce their lending in Hungary, they continuously withdraw their profits and funds from Hungary in huge amounts," Orban said.

The Hungarian Banking Association said the option to offer final repayment at fixed exchange rates was "unacceptable" and the plan entailed significant financial, macroeconomic and economic growth risks.

Gergely Suppan, an analyst at Takarekbank, estimated total banking system losses at well over 100 billion forints.

SUSPENDED

OTP and FHB, which sold off sharply on Friday when first details of the new plan emerged, were suspended on the Budapest Stock Exchange on Monday at their own request pending Orban's announcement, but the suspension has been lifted and trading will resume on Tuesday.

Orban said the government proposed to launch benchmark-linked interest rates on foreign currency loans to make their pricing more transparent, and said that banks' costs based in forints should be charged in forints only.

He said Hungary should brace for an international onslaught as a result of the plan, as after it launched Europe's highest financial sector tax, but this should not deter lawmakers.

"All I can say is that in case of unfavourable decisions we will take the appropriate counter-measures," Orban said.

The forint , which sank to a nine-month low on Friday, recovered slightly after Orban's remarks, trading at 281.95 versus the euro at 1442 GMT, off session lows at 284.30 hit earlier.

The cost of insuring Hungary's debt against default hovered about 450 basis points on a five-year horizon on Monday, off 2-1/2-year highs hit before Orban's speech.

One analyst said the plan, even in its tempered-down form, would continue to weigh on lending and dent economic growth, already seen at a meagre 2 percent this year and next, well below earlier government hopes of around 3 percent.

"The further sacrifices requested from the banking sector are significant but the most hair-raising element (the mandatory provision of HUF loans) was not included," said analyst Gyorgy Barta at CIB. For more comments, see

"Therefore sector stability may be harmed to a smaller extent than initially thought. Still, the possibility of full repayment without penalty could be a heavy blow to all players." ($1 = 207.337 Hungarian Forints) (Additional reporting by Michael Shields and Angelika Gruber in Vienna; Editing by Catherine Evans)

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