"From the economic point of view and from the law point of view it is a disaster," Josef Christl, an analyst and consultant at Macro-Consult and a former Board Member of the Austrian Central Bank 2003 -2008, told CNBC.com in a telephone interview from Vienna.
The law allows some borrowers to pay back loans taken in euros or Swiss francs in forint, at fixed exchange rates that are currently about 25 percent below market rates; the government said that, while helping borrowers stay afloat, it helps share the cost of the crisis with those who started it, namely the banks.
The losses on the difference will have to be taken by the banks who offered the loans, with Austrian banks on top of the list, as officials said they have around 6 billion euros in foreign currency loans.
About two-thirds of mortgages in Hungary are now in Swiss francs. Erste Bank has 3 billion euros ($4.08 billion) worth of Swiss franc loans, Raiffeisen Bank has 1.6 billion and UniCredit, through its subsidiary Bank Austria, has 800 million euros, according to Reuters.
Estimates regarding the losses vary, depending on how many people will actually take advantage of the legislation, which targets only borrowers who took the loans at exchange rates lower or equal to the ones set by the government - 180 forints for the Swiss franc and 250 for the euro.
"Banks have to take between 20 and 30 percent of the foreign exchange loans on their own account and they have to book them at losses," Christl said.
Borrowers in Central and Eastern European countries took out loans in foreign exchange during the boom years because of the lower interest rates and, with local currencies appreciating due to the countries' plans to join the euro zone, paying the monthly installments was easy.
But since the crisis hit, this carry trade has turned sour, with the local currencies falling sharply against the euro and the Swiss franc and leaving many borrowers struggling to make payments.
Critics say the banks, in their rush to expand and greedy for profits, made no efforts to explain to their often unsophisticated customers about the risk that the national currencies might also depreciate.
The net impact of the early repayment proposal could be a capital loss of between 20 percent and 40 percent for banks in Hungary, Gyula Toth, head of EEMEA FI/FX Strategy at UniCredit wrote in a market note before the legislation was approved.
Maximum losses for the banking sector would be between 2.2 billion euros ($2.9 billion) and 4.1 billion euros, depending on how the new law is applied, he added.
According to media reports, the Hungarian central bank – which is at odds with conservative Prime Minister Viktor Orban's government, who curtailed its independence – warned that the proposal threatens financial stability.
Under the law, borrowers must repay their mortgages at the discounted rate in full in one go and they have until December 30 to apply.
Banks Say They Will Sue
Banks slammed the legislation and threatened to challenge it in Hungarian and European Union courts.
"On legal side, it is clearly interference in private contracts," Christl said. "I would not be surprised if the Constitutional Court says this law is illegal and has to be changed."
"It is also a major violation of several laws of the European Union. This law has some kind of discriminatory aspect because it favors local banks over the foreign banks," he said, explaining that the foreign banks that made a lot of the loans will have to buy forint from Hungarian banks.
European legislation requiring members to ensure free capital and services movements may also have been breached by this, according to Christl.
Orban said the government was prepared to defend its legislation, according to a newspaper report quoted by Reuters.