Fri Jul 26, 2013 6:30am EDT
* Banks and markets bracing for mortgage relief plan
* Borrowers were duped into taking out loans: PM Orban
* He says relief scheme won't wreck financial system
* Banks are likely to carry lion's share of costs
By Gergely Szakacs and Christian Lowe
BUDAPEST, July 26 (Reuters) - Hungarian Prime Minister Viktor Orban said on Friday he will get rid of the foreign currency mortgages which, he alleged, unscrupulous banks duped borrowers into taking out, but he promised to do it without wrecking the financial system.
Orban's government, seeking re-election next year, earlier this month said it was planning relief for hundreds of thousands of borrowers who took out home loans pegged to the Swiss franc or euro, and then lost out when the exchange rate shifted.
Any measure is almost certain to cost the banks a lot of money, and risks damaging already shaky business sentiment in Hungary at a time when global investors are reviewing whether they should keep their money in the riskier emerging markets.
Speaking on public radio, 50-year-old Orban mixed withering criticism of the banks with soothing messages that seemed directed towards financial markets.
Talking about consumers who took out foreign currency mortgages, he said: "These people were fooled. The conduct of banks was careless at best, if not malicious. They tricked these people and lured them into these financial products."
"This is a situation that makes human lives and the Hungarian economy fragile. Therefore, we need to get rid of this situation," Orban said.
"NO BLITZKRIEG"
Banks in Hungary say the loan contracts were legal and they gave consumers full information.
Big foreign banks account for a large part of the mortgage business in Hungary, and they include Austria's Raiffeisen and Erste, Germany's Bayerische Landesbank and Italy's Intesa Sanpaolo.
Financial markets fear a repeat of a measure imposed in 2011 - known in Hungary as the final repayment scheme - under which borrowers were allowed to repay foreign currency loans in a lump sum at artificially low exchange rates.
The net cost to banks of that scheme was about 260 billion forints ($1.16 billion). Orban on Friday said this time around, the mortgage relief would be more nuanced.
"When you want something against which there is enormous resistance but it is important for the people, you do not need negotiations, you need a Blitzkrieg," Orban said. "The final repayment scheme was one such option."
"We are not aiming for such a solution but peaceful, calm talks ... We are proposing a solution that does not wreck the financial system but helps (borrowers) in trouble."
Orban has tangled repeatedly with big foreign institutions, from the European Commission, to the International Monetary Fund and big global firms, over policies his critics say are rash and driven by populism.
TESTING PATIENCE
So far, the holders of Hungary's hefty sovereign debt have kept faith because the country, with its good rates or return on bonds, has provided a welcome home for the "wall of money" created by the U.S. Federal Reserve's quantitative easing.
Signals from the Fed that it will print less money have reduced appetite for emerging markets, which could in turn make investors less willing to stick by Hungary.
After Orban spoke, the forint currency gained 0.5 percent against the euro, recovering from a one-month low.
Markets were reassured by the fact Orban has said the new mortgage relief would differ from the previous measure, and that the government relief would exclude people who took out mortgages to pay for items like cars or second homes.
The most likely option, people in the market said, is that the relief would still involve the banks re-setting the exchange rate at which the loans are calculated, but that unlike last time the re-payments would be spread over time.
Yet many crucial issues for banks remain uncertain, in particular what the exchange rate will be set at, and whether the government will contribute to the cost of the relief.
"The negative side is the unpredictability," Janos Samu, an analyst with Concorde Securities, a brokerage.
"To sum it up, it would be hard to mention a very, very positive impact, but it can be done in a way that could somewhat compensate the long-term negative impacts."
Whatever happens, banks will end up carrying most of the burden. Mihaly Varga, the economy minister, told news portal portfolio.hu that the state can only help "in limited terms" because EU rules keep its budget deficit capped.
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