Hungary celebrates IMF anniversary with another hit on the banks

By bne IntelliNews November 19, 2012

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Hungary marked the one-year anniversary of its application for a loan from the EU and IMF by unveiling yet another set of tax hikes. The move is likely to kick any potential loan deal even further down the road, while it also provides another hit to the country's banks.

Late on November 16, the National Economy Ministry unveiled its third austerity package for 2013 announced in the last six weeks. Aimed at improving the budget by a further HUF90bn (€316m), income tax on energy service companies will rise to 50% while the special banking tax will remain indefinitely, at the full 2013 level.

The measures are just the latest in a series that Budapest says it is rolling out in order to squeeze the budget deficit down to the target of 2.7% of GDP. That would allow it to leave the EU excessive deficit procedure and avoid a penalty cut in development funding.

However, the government's actions appear to be pushing further and further towards the extreme, with analysts repeating their warnings that piling more pressure on the banks in particular will only extend the hurt of an economy already in recession.

The head of the Hungarian Banking Association quit earlier in November due to the previous austerity package, which saw Budapest break its agreement with the lobby group by scrapping a plan to halve the special banking tax in 2013. That was the original plan for the charge when it was introduced in 2010, with the levy set to be phased out at the end of the year. Now, the sector is expected to continue providing HUF145bn or so per year via the special tax, on top of the new financial transaction tax which starts in January.

Thus, after two years of rough treatment for the sector, which has seen it fall into an overall loss for the first time in 13 years, Budapest appears to be essentially declaring that it has given up trying to work with the banks. The lenders have already been pulling back investment for over a year, which subsequently limits already meager lending to the economy. Recent figures on deleveraging in CEE by parent banking groups shows that it remains moderate in practically every market other than Hungary.

Meanwhile, energy has been a major target of Prime Minister Viktor Orban's government. Utilities have been paying special taxes since it came to power in 2010, and the PM said earlier this year that power distribution should be a "non-profit" activity. According to previous plans, energy service providers were to be burdened by a 30% tax rate (19% corporate tax and 11% Robin Hood tax), reports This is to be raised to 50% (19% corporate tax rate and 31% Robin Hood tax).

Orban said in October that the previous measures would not hurt the economy, as "the banks aren't lending anyway". However, Budapest's continued needling of the sector has already seen the IMF refuse to return for more talks on a bailout this year. The latest measures are unlikely to impress a lender that has insisted Hungary should cease imposing erratic taxes to focus on systemic reform and spending discipline. "Tomorrow marks the first anniversary of the start of Hungary's negotiations with the IMF," point out analysts at Capital Economics. "Unfortunately, we are no closer to a deal now than we were then... A series of haphazard measures, introduced abruptly and without due discussion, have caused the business environment to deteriorate, foreign investors to take fright and have put frequent obstacles in the path of an IMF deal."

As they point out, it is only the markets - which was the original force that pushed Orban to request the IMF's help - that will be able to force Budapest towards a deal. "When the forint has fallen below HUF300/euro, the authorities have typically made conciliatory comments," they write. "However, in recent months, the markets - which are perhaps tired of false dawns - appear to have stopped attaching as much weight to the government's statements... If the crisis in the euro-zone does re-escalate (as we expect), then fresh strains in Hungary's financial markets are likely to surface. This in turn could finally force the government to do a deal with the IMF and avoid an altogether more painful outcome."

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