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By Gergely Szakacs and Sandor Peto
BUDAPEST (Reuters) - Banks in Hungary cannot afford to foot the bill for Prime Minister Viktor Orban's plan to help borrowers struggling with foreign currency mortgages, a senior banker said, breaking foreign lenders' silence on Orban's latest high-risk scheme.
Orban's government, seeking re-election next year, wants to re-write the terms of home loans for hundreds of thousands of borrowers who took on debt pegged to the Swiss franc or euro, and then lost out when the exchange rate shifted.
On Friday Orban promised to negotiate over the new plan, which he said would not be as radical as a 2011 repayment scheme that cost the banks, who he accuses of duping consumers, over a billion dollars between them.
But any measure is almost certain to cost the banks a lot, 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.
In the first public comment on the government's plan by a foreign bank executive, the Hungary chief of Raiffeisen <RBIV.VI> said lenders were already reeling from previous government measures, and could not withstand more.
Heinz Wiedner, chief executive of the Austrian lender's Hungarian business, told Reuters in an interview he was encouraged by signals from Orban's government it was prepared to hold talks with the banks, but he said there was still uncertainty about what was being planned.
"There is ... no room on the banks' balance sheets any more after all these additional burdens that we are already taking," Wiedner said. "Just look at the banks' profitability in the sector, I mean clearly overall it is negative."
Banks in Hungary say the loan contracts were legal and they gave consumers full information.
"Like the state, the banks also actually are at a critical stage, and we are not able to suffer additional losses," Wiedner said. "So whatever solution we come up with has to be a solution which won't affect in any significant way either the state budget or the banks' profitability."
He said he had no answers on what that solution will be. "It will be a very difficult one to find even for the longer term a real solution. All parties really have to stick their heads together to see how it can be done."
Raiffeisen is in the top five of Hungarian banks. Other big foreign banks whose Hungarian units may be hit by the mortgage relief scheme are Austria's Erste <ERST.VI>, Germany's Bayerische Landesbank <BLGGgi.F> and Italy's Intesa Sanpaolo <ISP.MI>.
Orban, 50, has built his political reputation at home by tangling with big institutions from the European Union to the International Monetary Fund. His critics call his policies naked populism, while he says he is defending Hungarian sovereignty.
Talking on public radio on Friday about consumers who took out foreign currency mortgages, he said: "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. People with these mortgages will be an important constituency in next year's election.
But Orban mixed his tough message with a more conciliatory tone, that appeared designed to reassure jittery investors.
Lenders fear a repeat of the 2011 measure - 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.
"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."
Lenders have a vested interest in opposing a scheme that would cost them money. The net cost to banks of the 2011 scheme was about 260 billion forints ($1.16 billion) and the burden of any significant relief this time around is also likely to fall, to a large extent, on the banks.
Mihaly Varga, the economy minister, told news portal portfolio.hu that the state can only help "in limited terms" because EU rules capped the budget deficit.
In the short-term, one of Hungary's biggest vulnerabilities is that it has the highest sovereign debt in eastern Europe.
So far, the funds that hold the 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, and could prompt some investors in Hungary to review their position.
(Writing by Christian Lowe; editing by Philippa Fletcher)