Tim Gosling in Prague -

Lending capacity at Hungarian banks has dropped to its lowest level since the financial crisis struck in September 2008 as a result of tighter and more expensive funding, the Hungarian central bank said in a survey published on March 1. The fall is a direct result of the government's hostile attitude toward the country's mostly western-owned banks.

"The deterioration in lending capacity was last reported by such a proportion of banks upon the outbreak of the September 2008 crisis," the Magyar Nemzeti Bank (MNB) said in the survey, reports Bloomberg. A net 70% of banks that responded said they expect funding conditions to worsen in the first half of 2012, and explained that they plan to tighten credit criteria for corporate loans further.

Whilst the western European banks that dominate so many CEE markets have been cutting lending across the region in response to the cost of financing as the debt crisis rattles on, they are also facing a severe challenge to raise Tier 1 capital ratios to 9% to meet EU regulations, with the deadline set for the end of June. That forces them to make tough decisions about which markets they should pull back in.

Hungary is making it easy for them. The government has imposed high crisis taxes on the sector and forced it to shoulder losses under legislation offering foreign exchange borrowers the chance to pay off loans early at forint exchange rates far below the market.

As the MNB survey points out, the Hungarian banking sector recorded its first loss in 13 years in 2011 on the back of these conditions, making "regional competition for external funding more difficult for the the unprofitable Hungarian banking industry."

"Despite a relatively low Euro-periphery bank ownership share Hungary is amongst the most exposed of the economies in Emerging Europe to European bank deleveraging due to high perceived policy risk," suggests Tim Ash at RBS. "The danger is that with banks being forced to make hard decisions about where they deploy capital they don't need an excuse to more aggressively deleverage in economies like Hungary where credit/policy risk and the growth outlook is weak."

"Interestingly, and to its great credit, the [Hungarian central bank] has been proactive in trying to kick start credit," he points out. "Equally important will be real efforts by the government to quickly close a new financing agreement with the EC/IMF; foreign banks will view this as casting a policy safety net around them with regard to "off-piste" policy initiatives by the government in the banking sector."