Banking head walks on Hungary govt's broken promises

By bne IntelliNews November 14, 2012

bne -

With Budapest continuing to strong arm the banking sector despite apparent agreements to work with the banks, the Hungarian Bankers' Association (BSZ) on November 13 reported the resignation of its chairman, Mihaly Patai.

The announcement came a day after the Hungarian parliament approved a budgetary package prepared by the economy ministry that includes a provision wiping out a pledge to cut the country's extraordinary bank tax in half in 2013. According to MTI, BSZ said that the move undermines an agreed pact in which the government had agreed to first consult with the banks before taking decisions affecting the sector.

Patai, who heads the local unit of UniCredit Group, was reported to have told an extraordinary presidium meeting of BSZ shortly after the budgetary package was announced in late October that he would resign if the government broke the agreement he had spent weeks hammering out. He told the association he had "tried to consolidate relations between banks and the cabinet," but after the government unilaterally threw out the previous agreement this was no longer possible.

The same budget package that was passed on November 12 includes a doubling of the new financial transaction tax that starts next year, piling extra pressure on banking profitability. The association notes that the government had earlier promised in talks to uphold a plan to cut what the banks have said is the highest banking tax in Europe.

The 50% cut in the windfall levy in 2013 was the original plan when it was introduced by the Fidesz government shortly after it entered office in 2010. The tax was then planned to finish by the end of the year. However, officials have also recently indicated that it is set to persist in 2014 - by claiming it will be cut in half in that year.

Since then, the banks have expressed outrage at what they say is rough handling by the government of PM Viktor Orban. They were forced to shoulder hefty losses in late 2011 under a government scheme allowing borrowers with foreign currency mortgages to repay their loans early, at exchange rates well below the market. That helped push the sector to its first consolidated loss in 13 years, the association revealed earlier this year.

The pressure has continued with the windfall and financial transactions tax issues. The bitter standoff has helped make the decisions faced by the capital-hungry Eurozone banking groups that dominate over where in the region to pullback investment that much easier.

Recent reports on bank deleveraging all note Hungary as an outlier. It was one of only two CEE states (alongside Slovenia) to see a pullback by parent banks of over 10% of GDP in the second quarter, according to a recent report from the Vienna Initiative. By way of contrast, its Visegrad peers are suffering little adverse affect. That has seen reports that bank lending has all but dried up in Hungary, helping push an already sluggish economy into recession.

Budapest's reaction appears to be cutting off its nose to spite its face. PM Orban said in late October that the latest plan, breaking the agreement with BSZ, would not hurt the economy as "the banks aren't lending anyway."

Instead, the sector is bracing itself for another hit after the central government announced recently a plan to consolidate HUF612bn (€2.15bn) in municipal debt. Orban sprinkled the statement with a couple of the cryptic threats he so favours, and reports since suggest Budapest intends to push the lenders to take a haircut of up to 25% on the debt, although there has been no confirmation.

Analysts at Capital Economics write in a report: "As it happens, we suspect that a restructuring of local government debt would result in smaller losses being imposed on banks than was the case under the mortgage repayment scheme. After all, local government debt is much smaller than FX mortgage debt."

Assuming the media reports are accurate, they suggest losses for the banks could amount to HUF150bn at most. That, they say, would reduce the aggregate tier 1 capital ratio of Hungarian banks by just 50 basis points to 12%. "By contrast," they note, "banks faced much larger losses of around HUF260bn under the mortgage repayment scheme."

"[T]he fact that any restructuring of local authority debt would probably constitute a sovereign default in the eyes of the ratings agencies means that the government is likely to think twice before pursuing such a course of action," the analysts add. However, Orban already said at the weekend that it is "obvious" that any such haircut would constitute a default.

"[T]he very fact that the government appears to be considering such a course of action illustrates a point we've been making for some time," Capital Economics concludes; "namely that austerity alone is unlikely to resolve Hungary's debt problems, and default (or "restructuring") will continue to form part of the solution."

Related Articles

UK demands for EU reform provoke fury in Visegrad

bne IntelliNews - The Visegrad states raised a chorus of objection on November 10 as the UK prime minister demanded his country's welfare system be allowed to discriminate between EU citizens. The ... more

Erste claims Hungary is breaking peace deal with banks

bne IntelliNews - Hungary will breach its February agreement with Erste Group if it makes the planned reduction in the bank tax conditional on increased lending, the Austrian lender's CEO ... more

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.