Economy 13 December 2022, 2:05pm

Hungarian gov't scraps loan repayment moratorium

Portfolio

The moratorium on loan repayments is to be abolished in 2023, Hungary's Ministry of Economic Development has announced on Tuesday.

According to a statement sent by the ministry to state newswire MTI,

the number of people in the moratorium has fallen significantly, so the government is not extending the moratorium, which expires at the end of the year.

The explanatory memorandum explains that the temporary payment moratorium was introduced in March 2020 and applied to all retail and corporate customers. However, the number of people in the moratorium has now fallen significantly and the government will not extend it beyond 31 December 2022. The ministry stressed that the government will continue to provide assistance in repaying debts, as repayment rates are not allowed to increase after the moratorium is phased out.

The communication recalls that the moratorium was initially extended until the end of June 2021 and then until the end of October 2021 instead of the end of 2020. As the economic impact of the coronavirus pandemic eased, from November 2021, the moratorium on repayments remained available only to certain particularly vulnerable groups (pensioners, debtors expecting or raising children, those employed in public works and those whose income had fallen as a result of the pandemic) and businesses in financial difficulty (whose turnover had fallen by at least 25% compared to the previous year), provided they had applied before October 2021 and then by the end of July 2022.

Due to the increasing number of customers leaving the moratorium

ONLY 1% OF CORPORATE LOANS AND 3% OF RETAIL LOANS WERE IN THE TARGETED PAYMENT MORATORIUM by August 2022, WHICH figures have SINCE DECLINED FURTHER.

In its decision, the government considered that the interest rate freeze, which affects 350,000 families and 60,000 businesses, already provides adequate protection and that there is no justification for maintaining the measure, according to the statement.

The ministry said:

the legislation guarantees that, despite the lifting of the moratorium, the interests and charges accrued during the participation in the moratorium may not lead to increased monthly repayments from January 2023;
the repayment of the debt can be achieved by extending the maturity.

Hungary's credit moratorium, which was triggered by the COVID-19 pandemic, has been in place for the longest time in all of Europe and should have been lifted this time last year.

For the banking sector, the abolition of the moratorium is in itself marginally positive, as (1) the deferred interest payments on loans under moratorium that had accrued during the moratorium period could not accrue compound interest (i.e. the moratorium reduced the net present value of the loan), and this resulted in a negative profit effect.

This type of accumulation will now be eliminated for the small number of loans remaining in moratorium, (2) banks will be allowed to release part of the provisions they are obliged to make for moratorium loans classified as Stage 2.

But the big question will be the longer-term negative impact: will the small number of customers left in the moratorium become solvent? How many free-loaders were in the system?

We do not know the answers to these questions, but it is possible that the stock of non-performing loans at banks will increase somewhat after the moratorium ends on 31 December. This could have some negative impact on the supply side of the housing market, but the likely extent of the deterioration is difficult to predict.