Hungary may need to modify its approved legislation on reducing its bank tax under pressure from Brussels, Economy Minister Mihaly Varga claimed on November 12. 

The official said the changes would reflect concerns raised by the European Commission. He insisted, however, that any modification would not influence the banking peace deal Budapest signed with the EBRD and Austria’s Erste in February.

Under that agreement, 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. It was also agreed that Budapest and the EBRD would each buy a 15% stake in Erste's Hungarian unit, while the Austrian bank agreed to make an additional €550mn available for lending.

The tax reduction was quickly written into the 2016 budget as Budapest hoped to earn an escape from junk status with the major ratings agenies. Thus far, however, the sovereign remains without an investment grade.

The European Commission has raised two objections, Varga claims. The first is that the government is also offering additional tax benefits totalling HUF10bn to those banks that increased their lending even during the crisis. The official said the commission may consider this as illegal state aid, Portfolio.hu reports. The second objection is that the cabinet is offering benefits to banks that incurred massive losses, especially in Ukraine and Russia.

“If we need to modify the bank tax, this will be the reason”, Varga said. “All this, however, should not influence the agreement with Erste and the EBRD, which includes the reduction of the bank tax and the acquisition of a stake in Erste by the state”.

Last week, Erste’s chief executive Andreas Treichl threatened to walk out of the deal if Budapest makes the planned reduction in the bank tax conditional on increased lending. Varga has reiterated the government does not plan to link the planned bank tax to lending targets for banks. The government’s stance goes against the view of the central bank, which has spent months insisting any tax reductions should be directly linked to increased credit provision.

The Magyar Nemzeti Bank, which over the past few years has been practically the only new lender of significance in Hungary, has recently offered incentives for banks to boost lending.