Hungary fx loans should withstand court scrutiny - financial law experts

BUDAPEST Fri Dec 13, 2013 11:10am EST

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BUDAPEST Dec 13 (Reuters) - Hungary's top court is unlikely to issue the kind of ruling on the legality of foreign currency mortgages weighing on hundreds of thousands of households that would cripple the banks who issued them, financial law experts told Reuters.

But they said the court, which holds a news conference on Monday, may find fault with some aspects of the way the costs of the loans were calculated and administered.

That could lead to the banks, mostly foreign-owned, paying back some cash to borrowers.

Prime Minister Viktor Orban, fighting for re-election early next year, wants banks to ease the burden on the many households left with huge debts after the home loans they took out in foreign currencies ballooned as the Hungarian forint sank.

The government says it wants the court, known as the Kuria, to rule on the issue, clearing the way for a government-imposed relief scheme.

Banks operating in Hungary, including units of Raiffeisen , Unicredit and Erste Bank, fear the court ruling could provide the basis for new measures to help borrowers at the expense of the banks, which posted losses of over 1 billion euros after a 2011 government-imposed relief scheme.

The court will examine whether the loans - denominated in Swiss francs or euros but disbursed and repaid in forints - are indeed foreign currency loans. If it rules they are not, that could be grounds to declare them invalid.

That would be the worst outcome for the banks, although the financial experts said that was unlikely.

"I don't think it is realistic to expect the Kuria to declare the contracts null and void," said Tamas Banfi, a former central banker and now head of the Faculty of Finance at Budapest's Corvinus University.

"This is a financial question: The source of the loans was foreign currency and not forints," he also told Reuters.

Zoltan Bodnar, an associate professor of financial law at Budapest's ELTE University, also said he did not believe there were grounds for the court to rule the loans were invalid.

The court is scheduled to hold a news conference at 12:00 GMT on Monday. It is not clear if the court would be announcing its final ruling on the forex loans.

While it is unlikely to rule that the loans are invalid, it may go against the banks on smaller points, the experts said.

These include the question of the spread, the difference between the rate at which foreign currency is bought, and the rate for which it is sold. Typically, the spreads applied by banks are a small fraction of the monthly repayments.

In a case involving OTP Bank, the country's largest lender, the Kuria in July ruled that the spread was a cost and should have been defined in the contract - and it ordered the bank to repay some of the money.

Another issue open to interpretation by the court is whether the conditions in the contract allowing the banks to make unilateral modifications to the loan, such as increasing the interest rate, were made clear to clients.

If the court rules against the banks on this point, they could have to pay back the interest rate rises. Still, Bodnar said it was unlikely the judges would find the changes were not transparent.

"I believe the Kuria, acting responsibly, cannot say that the contractual terms which allowed unilateral changes in interest rates... were unfair and thus invalid," he said. (Editing by Hugh Lawson)

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