Hungary's Prime Minister Viktor Orban proposed on Monday a plan to fix foreign exchange rates to help Hungarians with foreign-denominated loans hit by a soaring Swiss franc.
"The proposition for a full forint repayment of loans taken out in Swiss francs, euros or Japanese yen is feasible," Orban told parliament on the first day of the autumn session.
Under the plan, the government would allow one million Hungarians with foreign-currency debts to repay their loans in a lump sum at a rate of 180 forints to the Swiss franc, 250 forints to the euro and two forints to the yen -- about 20-percent stronger than the current forint rate.
"It is at this rate that we have to make it possible to pay back the loans in Hungarian forints. The banks will not be allowed to charge any additional fees," Orban said.
Currently, one Swiss franc is worth 230 forints, one euro 277 forints, and one yen 2.71 forints.
Debtors will also be able to take out loans in forint to finance the transaction, effectively converting foreign-currency loans into forint-denominated ones, according to experts.
Although the difference between the current and fixed rates would translate into a loss for the banking sector, Orban insisted the burden would be shared, as the majority of loans were taken out at a rate of 155-160 forints to the Swiss franc.
"Up to 180 forints per franc, the borrower shoulders the responsability, above that, the bank," Orban said.
According to the Hungarian Financial Supervisory Authority, 80-85 percent of all foreign-denominated loans are in Swiss francs. No figure on the total value of outstanding foreign-denominated loans was immediately available.
However, an analyst at CIB, the Hungarian unit of Italian bank Intesa Sanpaolo SpA, estimated if all loans were converted that Hungarian banks stood to take a hit of 1.2 trillion forints ($5.8 billion), or approximately half of their equity.
Hungarians rushed to take out loans in Swiss francs and other foreign currencies in 2004-2005 due to advantageous interest rates but have been struggling to make their monthly installments as the Swiss franc soared, in turn stymying consumption and slowing economic growth in Hungary.
Those who took out loans denominated in euros and yen have also been hit hard by appreciation.
Orban added that the decision should not disrupt banking activity in Hungary.
"The activity of foreign banks has been dwindling in Hungary anyway," he added.
"Banks have their foreign parent companies, while we (the government) are behind the Hungarian banks."
The proposal, which Orban described as a "national defence programme" against indebtedness in a speech peppered with military rhetoric, has yet to be submitted to parliament but is widely expected to go through, given the two-thirds majority his Fidesz party enjoys in the assembly.
The finance sector did not welcome Orban's rescue plans.
"The plan endangers the stability of the banking sector," said Gyorgy Barta of CIB bank in an emailed note.
"The government has again made a decision in 2-3 days without consulting experts and those affected," said research firm GKI, warning that the move might shake investor confidence by "overwriting with force the private contracts between borrowers and banks".
As relatively few borrowers have the funds to fully repay their loans, analysts are sceptical the plan will have much of an impact unless Hungarian banks offer forint loans.
Analysts also said the decision might be in conflict with EU law, international treaties and the Hungarian constitution.
Orban also announced plans to set water utility, sewage and garbage collection fees centrally.
The government had asked for a green light from Brussels for a 35-percent consumption tax to be slapped on luxury goods to fill budget holes, he added.
Austria meanwhile asked the EU's executive European Commission to look into Orban's proposal.
The Commission "can appeal (any such decision) before the European Court of Justice" which would then have to look into the matter, Austrian news agency APA quoted Foreign Minister Michael Spindelegger as saying at a press conference in Brussels.
Spindelegger, who is also deputy head of government, said Orban's plans represented losses of six billion euros for Austrian banks in eastern European countries and would "threaten their existence".
"We cannot accept such a procedure," he added, referring to Orban's plans as they were a "violation of what we have achieved in the EU. Private contracts must be respected".