Hungary offers compromise to banks in bid to boost lending

By bne IntelliNews December 12, 2014

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Hungary wants to offer the country's battered banks a new deal, in a bid to get them to restart lending, Prime Minister Viktor Orban said in comments published on December 12. The move reflects the fact that following the government's offensive against foreign-owned banks, lack of credit and investment from private sources is already starting to slow the economy. 

Orban claimed in an interview with the Napi Gazdasag daily that the government has offered to lower the burdens it has placed on the sector in exchange for increased lending, reports Reuters.

"A new chapter will begin soon," Orban said. "We are in non-stop talks with banks and I hope we can sign an agreement soon. We want burdens on banks to be bearable, and in exchange the sector should play a much bigger role in financing the economy."

The volume of loans to non-financial companies rose just 0.3% to HUF6.7 trillion in the third quarter. That's a small rebound since it sank to its lowest in seven years in March, reports Bloomberg.

The central bank is currently the main source of credit in the economy, suggest analysts. The NBH's "Funding for Growth" programme has been expanded to up to HUF2 trillion (€6.5bn) until the end of 2014, with an emphasis on financing new investments.

Lenders in Hungary have been under immense pressure since Orban’s Fidesz party came to power in 2010. In addition to paying Europe’s highest bank tax, the introduction of a financial transaction tax and a relief scheme for mortgage borrowers, the government is now forcing banks to compensate borrowers for credit practices deemed unfair, leading to huge losses. Banks are also expected to incur losses as a result of newly-adopted legislation forcing them to convert $14bn of foreign-currency mortgage loans to forints.

Analysts warn that  banks' wariness to take on greater exposure to the market will contribute to the slowing of growth from around 3.2% in 2014 to 2.5% next year. Worse could follow, according to many outlooks. 

With the economy heading for a slowdown next year, the government is looking for ways to increase the banking sector’s role in financing the economy. One option is to reduce the tax burden. Orban, however, refrained from saying whether the new deal would envisage a cut in the bank tax.

"It is too early to talk specifics," he said. "Everybody is interested in a long-term, stable solution. And the chances to get one are good."

Buying spree

The continued pressure on the banks is also seen as a means to force out the foreign groups that dominate much of the market at low valuations. The government has now said it is seeking to have up to 70% of the banking sector in Hungarian hands. The state has this year agreed the acquisitions of Budapest Bank from GE Capital and MKB from Germany's BayernLB.

However, the owners of the very largest lenders insist they have no plans to leave. The local units are weighed down by large portfolios. Raiffeisen mulled an exit in January, only to recieve a single bid of €1.

Hungarian officials, meanwhile, continue to insist a large-scale consolidation is on the way. Orban suggested the state may is ready to buy more banks if the right offer comes up, but claimed there are other ways in which foreign owners could leave.

"There are strong Hungarian banks, and there is also the stock exchange," he said. "There are several techniques. What I do not support is the method Hungary once followed, selling everything to foreigners outright."

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