UPDATE 2-Hungary's central bank suggests more FX mortgage concessions
* Central bank study: earlier scheme should be extended
* Says principal payments of borrowers should be reduced
* Talks between government, banks to continue on Tuesday
* Cbank proposal less radical than immediate conversion would be
By Sandor Peto
BUDAPEST, Aug 26 (Reuters) - Hungary's central bank proposed forgiving part of principal payments on foreign currency mortgage loans on Monday, a day before the government and commercial banks meet to discuss further help for borrowers.
Repayments on once-popular foreign currency loans including mortgages have surged in recent years as the forint's value has fallen and the Swiss franc - in which most of them are denominated - has strengthened, pressuring households and choking consumer demand.
Prime Minister Viktor Orban and his Fidesz party want to see these mortgages converted into forints as that would eliminate the currency risk arising from a weaker forint.
A new relief scheme could also win him votes in elections next year, while households would have more money to go out and spend, thereby helping the weak economy.
Only a little over a third of eligible loan holders have joined a scheme that allows repayments at a below market exchange rate of 180 forints to the Swiss franc, compared with market levels of 241.30 on Monday.
The loan holders have to pay the difference, which accumulates in a separate forint account, after a five-year grace period. The state and banks jointly bear the interest rate costs.
Many borrowers have been hoping for an even more generous scheme, however.
Central bank vice governor Adam Balog and managing director Marton Nagy said on Monday that the scheme could be more attractive if part of the principal payments on the loans were also forgiven and the grace period extended.
"This would not be a one-off, immediate conversion of foreign currency loans but a gradual and full conversion into forints, a full elimination of the exchange rate risk on the debt," they said.
So far 153,800 borrowers have joined the scheme and a further 257,600 could join, with their monthly repayments dropping immediately.
It was not clear from the central bank study whether the banks, the state, or both jointly would bear the losses from lower principal payments if those were forgiven above the rate of 180 forints per franc.
The economy ministry declined comment on the scheme, while the bank association was not immediately available to speak about it. It was not clear whether the central bank's idea was an official proposal for the talks set to be held between the government and banks.
The bank said in a study prepared by two close allies of its Governor Gyorgy Matolcsy that the measure would cost 30 billion to 40 billion forints ($180 million) annually.
Hungary's mostly foreign-owned banks, already burdened by one of Europe's biggest taxes, have been worried that the new programme urged by the government would deepen their losses.
Foreign currency housing mortgage loans total over 1.8 trillion forints ($8.1 billion) and are mainly in Swiss francs . The government has so far talked about further help to housing mortgage holders only, but the central bank's proposal seems to cover all foreign currency mortgages, equity-type mortgages included - with the total stock at over 3.5 trillion forints.
Eliminating the foreign currency risk on all these mortgages would give the central bank much more room to manoeuvre and cut interest rates further still, having lowered them steadily for more than a year.
Analysts said the central bank's idea was much less radical than any immediate conversion into forints and could easily be close to the solution to be carved out in the talks.
"I think banks can take a breather as this is entirely different from an immediate conversion," said Janos Samu, an analyst at Concorde.
The banking sector posted a loss of 165 billion forints in 2012 and a 73 billion forint profit in the first quarter of 2013 was followed by a 50 billion forint loss in the second quarter as the government levied new taxes on banks. ($1 = 222.2031 Hungarian forints) (Additional reporting by Krisztina Than; Editing by Ruth Pitchford and Hugh Lawson)
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