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 claimed on November 6.

The complaint from Erste will do little to help Hungary convince commercial banks to raise lending to the economy, which is showing signs of slowing. They remain wary of policymaking after several years of tough treatment.

The central bank recently offered incentives for banks to boost lending, having spent months insisting any tax reductions should be directly linked to increased credit provision. Over the past few years, the Magyar Nemzeti Bank has been practically the only new lender of significance in Hungary.

Under the deal reached with Erste and the EBRD, the Hungarian government pledged to cut the bank tax - the highest in Europe, introduced shortly after Fidesz took power in 2010 - as of next year. Budapest and the EBRD are set to each buy a 15% stake in Erste's Hungarian unit as part of the agreement, while the Austrian bank agreed to make an additional €550mn available for lending. 

The tax reduction has been written into the 2016 budget. The fiscal plan was released early this year in a bid to convince the ratings agencies - which openly expressed scepticism - that Budapest would follow through on its promises. Should the deal with Erste fall through, the ratings agencies would also likely take a dim view. Budapest has been pushing to escape junk status - into which it fell in 2012 - for some time.

However, the effect on lending would likely be more painful for Hungary. Battered by erratic policymaking over the past five years, the banks have remained wary of Budapest's promises of a new, more friendly approach. The proffered tax cuts - which are meant to continue i 2017 and beyond - have so far failed to boost credit to the economy. That has seen government officials and the central bank increasingly talking about reviewing the February deal so that the reduced levy is intrinsically linked to raised lending.

“Some people in the government and the central bank like to link the reduction of the banking levy to loan growth," CEO Andreas Treichl told a teleconference while presenting Erste’s results for the first three quarters of the year. "This is a very clear breach of the MOU, and we made that very clear to both the central bank and the government that we would not accept any conditionality so I hope they will refrain from that." 

The government’s plans to make the financial sector to pay for client losses following the collapse of three brokerages early this year would also violate the agreement, he claimed.

“We made it very clear to the government that if that case is not solved amicably between the government and the banks, there will be no participation,” Treichl told an earlier conference call, according to Bloomberg.

Three brokerages collapsed early this year with losses reported at over HUF100bn. In April the parliament approved a bill that seeks to compensate the victims while loading a chunk of the costs onto banks.