ECB sees risks from Hungary loan repayment scheme

(FRANKFURT) - The European Central Bank warned Tuesday that a Hungarian scheme aimed at helping borrowers struggling to repay loans taken out in foreign currencies posed a potential threat to banks in the region.

The scheme, passed by the Hungarian parliament in September, "creates a situation that can substantially weaken the banking system's stability," the ECB wrote in an opinion.

It was also likely to have "adverse spillover effects on the economy," the central bank said in the paper which was dated November 4 and signed by ECB vice president Vitor Constancio.

In recent years, large numbers of Hungarians took out loans in currencies such as the Swiss franc in order to secure advantageous interest rates.

But the slump in the Hungarian forint since the country nearly went bankrupt in 2008 has pushed up repayments and increased the threat of default, so the government was forced to draw up a scheme to alleviate households' debt burden.

The scheme has, however, already drawn condemnation not only from banks themselves, but also from the EU, as well as neighbouring Austria, whose banks have a heavy presence in Hungary.

The ECB complained too that it had not been properly consulted in the drafting of the legislation and said the scheme could have "a negative impact" on Hungary's public finances.