Economy 16 December 2013, 1:43pm

Hungary Highest Court reaches verdict on foreign currency loans (2)

Portfolio

Hungary's Curia (Supreme Court) has reached a legal opinion to ensure complex issues of foreign currency lending receive uniform treatment in lower-ranking courts, Hungary's highest judiciary body said on Monday. In the Curia's opinion, courts of law alone cannot be expected to single-handedly address the problems related to FX loans, and its own role is limited to interpretation of the law. No decision was made on the most critical point, i.e. banks' one-sided changes to contracts.

The Curia reached a verdict with a majority vote of more than two-thirds, after a highly intense debate. The Highest Public Prosecutor made a position statement and so did the Governor of the National Bank of Hungary. The decisions in a nutshell:

1. Loan contracts denominated in foreign currencies are agreements that enabled borrowers to take advantage of more favourable interest rates compared with forint loans, therefore all risks associated with currency rate fluctuations are to be borne by the borrower.

2. The risks associated with exchange rate fluctuation alone do not constitute sufficient grounds for invalidating such contracts as being illegitimate, unethical, usurious, false. The risks alone do not render the service as non-viable. The unforeseeable shift in the financial burden in itself does not render the agreement null and void.

3. Financial institutions were required to inform clients on the possibility of currency rate changes, and its impact on the monthly payments due.

4. In the event that a court verdict finds a contract null and void, courts must seek a way to amend the contract and restore its validty, if it is possible to eliminate the factor that rendered the contract null and void.

5. Should one of the terms and conditions of a contract be found null and void, the contract remains binding in all other respects.

6. As concens one-sided amendments to the contracts by the lender, the Curia defers its decision until the European Court of Justice reaches a preliminary ruling on the issue.

7. Court verdicts are intended by the law as a means of rectifying individual cases in which the change of circumstances resulted in substantial disadvantage to one of the parties. They are not suitable to rectify contracts on a massive scale. If legislation is made to amend the disadvantageous consequences, such legislation leaves no room for individual judiciary deliberation.

Péter Darák, President of the Curia (l) and György Wellmann, Head of the Civil Department at a College meeting on 16 December 2013.

The verdict has a positive legal impact while its financial impact is negligible, considering that

It will help ensure the uniformity of judicial practices, contrary to the current situation whereby contracts are occasionally declared null and void even only one or two of the contractual terms are invalid.

With the exception of the issue referred to the European Court of Justice, the Curia has acted with due haste, contrary to expectations that it could bend in to political pressure or other reasons and wait until the spring of 2014.

At the same time, the most critical issue is still undecided; the European Court may reach a verdict in February at the earliest on the criteria against which the legitimacy of one-sided contract amendments should be judged.

Some relevant court rulings have been reached in the past few months on a case-by-case basis regarding the legal status of banks' one-sided interes rate hike decisions, and their right to employ a currency rate margin. These are perhaps the most salient points on which the ultimate decision will be made by the European Court.

In light of the above banks will most likely escape the need to re-appraise their massive foreign currency loan debt portfolios before the end of the fiscal year, which serves to soothe nerves in the financial sector in the short term. At the same time, uncertainty will linger on.

At Portfolio.hu we believe the Curia is right in pointing out that the judiciary is not a position to remedy Hungary's mass-scale foreign currency debt problem. That is, with the exception of an important issue being referred to the European Court, the Curia passed the buck back to the government. However the decision does not make things any easier for the latter; today's verdict, at best, will give a measure of reassurance that the majority of foreign currency loans are still valid.