Under the terms of an agreement between the Government and the Hungarian Banking Association of December 2011 as well as an amendment to Act LXXV of 2011 on the fixing of exchange rates for repayments of foreign currency loans and forced sales of residential property, financial institutions are required to convert foreign currency loans of borrowers delinquent for more than 90 days into forints and forgive 25 per cent of their claims, provided that the provisions of the Act are met.

In view of the success of the euro sale tenders related to the early repayment scheme, the market’s favourable reception as well as the strong take-up of the facility, the Monetary Council has decided that the Bank will conduct euro sale operations between 15 May and 15 June to make available for credit institutions the foreign currency needed for the hedging arising from conversion of foreign currency-denominated loans into forint. The Bank will be ready to provide foreign currency for institutions up to the total amount outstanding of their foreign currency loans to be converted into forints (including amounts forgiven). These institutions will be able to purchase from the Bank the amount of foreign currency required to meet their statutory conversion obligation in the period from 15 May to 15 June by conducting spot foreign exchange transactions, with the total amount subject to conversion spread out evenly over trading days.

In order to define the individual conversion limits for each credit institution, the Bank will require the institutions concerned to provide data on 11 and 21 May on the stock of loans they are obliged to convert. Meeting this requirement is a precondition for institutions to participate in the operations. In addition, the Bank will also require credit institutions to use the foreign currency acquired from the Bank first to reduce their short-term foreign liabilities. As a result, the operations will have no material impact on Hungary’s external vulnerability.

The main aim of the facility made available is to reduce market demand for foreign currency and prevent potential adverse macroeconomic effects and to close credit institutions’ open foreign currency positions resulting from conversion. Preliminary estimates suggest that the total amount of foreign currency loans affected by the operations may be at most EUR 440 million; however, the amount actually converted in the operations is expected to be significantly lower. Consequently, the overall effect of the operations on the Bank’s foreign exchange reserves is likely to be materially smaller than that of the euro sale tenders related to early repayments of foreign currency loans.

Detailed information on the terms and conditions of the Bank’s euro sale tenders related to the conversion of foreign currency loans delinquent for more than 90 days is available via this link.

Monetary Council