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The fight between the Hungarian government and the country's banks appears to be back on after a month or so of dentente, with reports that seven banks are under investigation by the Competition Authority over suspicion that they have been operating a cartel arrangement on mortgages. The news almost instantly spooked the markets, with the forint sliding sharply on the uncertainty that currently rules in Budapest.

Since Prime Minister Viktor Orban's government came to power last year, tensions with the banks have risen steadily on the back of special taxes waged on the sector and the early repayment scheme for foreign-exchange mortgage holders, which forced the banks to shoulder the burden of the weakened forint. The passing of the latter in September pushed things to fever pitch, with the European banking groups that control much of the market blaming group losses on the law in the third quarter.

However, some calm was restored when the government said it would talk to the banks to discuss their proposals before initiating any further regulation. The banks meanwhile welcomed the move on the one hand, and set about pushing their case with EU authorities to challenge the regulations at the same time. That, alongside the battering that Hungary has taken from the markets - much of it motivated by the "hostile regulatory environment," as the banks have called it - has put Budapest on the defensive once more, which bodes ill for everyone.

With European banks already facing huge demands for additional capital to protect themselves against raised risk across the eurozone, the fight in Hungary, and the pressure on the banks' balance sheets, risks slowing lending even further and thus holding back already sluggish growth. A resumed battle between the government and the banks would only see the markets take another step back, risking even higher borrowing costs for Budapest, which is back in talks with the International Monetary Fund for a precautionary loan to backstop its finances.

However, the state is apparently ready to risk that in its bid to force the banks to help reduce the country's exposure to forex debt, which it has said is tying the hands of its macro-economic policy. Hence, the pressure back on the banks.

In the firing line

The cartel investigation has been initiated against local banks OTP and Fundamenta-Lakaskassza, as well as subsidiaries of Erste Bank, Raiffeisen Bank International, Intesa Sanpaolo, UniCredit and Bayerische Landesbank, the Competition Authority said in an e-mailed statement on November 23, reports Bloomberg, adding that some unannounced inspections have already been carried out.

The authority claims that just three days after the early repayment scheme for forex debt was passed on September 19, the lenders raised interest rates on mortgages "significantly" and introduced new products with higher rates. The banks raised rates 0.5-2.0 percentage points, it claimed. The authority has an initial six months to conduct the probe, although it has two opportunities to add additional six month windows. "The probable explanation for the simultaneous increase is an agreement amongst banks," the statement added, claiming that according to unnamed sources: "The supposed agreement was that banks offer products with higher interest rates and limit access to lower interest-rate products in connection with the early repayment of foreign currency loans."

Laszlo Biro-Kiss, spokesman for Raiffeisen's Hungarian unit, said the bank is ready to answer all questions from the authorities, as "it has kept and is keeping all relevant laws and regulations." All the other banks refused to comment or were unreachable, according to Bloomberg.

Tim Ash at RBS pointed out in a note just how quickly the markets reacted on November 23, with the forint suffering almost instant losses. "[The forint is] getting hit significantly this morning....in a European bank de-leveraging environment, the Hungarians don't need to give foreign banks another reason to head for the exits. Also the commentary on the IMF is really not clear/specific enough. Bottom line for Hungary, the markets are not that concerned about the financing story, they are worried over the lack of a policy anchor, and they want an IMF programme with conditionality. The government is still banging the line that they don't want conditionality."

However, the analyst also points out that the government is in a tight spot. "Until the government wakes up and smells the roses and surrenders some sovereignty to the Fund/outside anchors, the [forint] is not going to turn around. The problem for Fidesz/Orban is that its popularity is on the decline and that of the opposition nationalists is on the rise ... Orban is thus having to keep a very independent/populist policy line to keep the nationalists in check and this kind of makes it difficult for him to cut a deal with the IMF a la conditionality."