* Contracts can be modified retroactively by law - top court
* Modifications must maintain balance of interests
* Government says FX loans exploit Hungarians, eyes law changes
BUDAPEST, March 17 (Reuters) - Hungary has the right to modify the terms of foreign-currency loans, the country’s constitutional court ruled on Monday, the latest turn in an ongoing legal battle over the troubled loans.
The court ruled contracts may be modified retroactively, an interim phase in a long-running legal dispute over the loans. It stopped short of declaring them unconstitutional, which analysts said was a relief for Hungarian banks, who fear new government measures could impose fresh losses on them.
The government had asked the court to consider whether some conditions of foreign-currency loan contracts that are weighing on Hungarian households might be unconstitutional and how existing contracts could be modified through legislation.
Foreign-currency mortgages were popular in Hungary before the 2008 global financial crisis. Since then, the forint has weakened and loan payments soared, leading to widespread non-payment.
“The lawmaker, just like courts, is entitled to modify current and lasting contractual relationships if conditions that set in after the contract is signed mean sustaining the contract with an unchanged content hurts the substantial and justified interest of one of the signatories,” the court said.
It said lawmakers can intervene if changes in contract conditions were “not rationally foreseeable” and many contracts were involved. “Such contract modifications must strive for a balance of interests within the altered conditions,” the court said.
Prime Minister Viktor Orban’s centre-right government, which looks set to win elections on April 6, says foreign currency-denominated loans exploit ordinary Hungarians. It wants to implement a relief scheme, for which banks will probably have to foot part of the bill. But it said it would wait for legal issues to be ironed out before taking any new measures.
The next stage in the legal maneuvering is a final ruling expected from the European Court of Justice in coming months.
Hungary’s supreme court has already ruled on the main legal issue, finding that lenders were not to blame when borrowers lost out because the exchange rate changed.
That was a partial reprieve for banks, which are largely foreign-owned. They include units of Belgium’s KBC, Austria’s Raiffeisen Bank, Erste Bank and Italy’s Unicredit. Banks have already lost more than a billion euros in a 2011 relief scheme.
Analysts say Hungary is vulnerable to a sell-off set off by turbulence in emerging markets. A relief scheme that hurts banks badly could add to investor concerns, they say.
The shares of OTP Bank, Hungary’s largest lender, rose 2.6 percent at 3,718 forints at 1032 GMT.
“This news that the government could touch loan contracts retroactively in certain cases does not really say anything,” said Akos Horvath, an analyst at brokerage Equilor. “Specifically, the Court did not order any change (in the contracts).” (Reporting by Krisztina Than and Marton Dunai; Editing by Larry King)