Tim Gosling in Prague -
Hungarian Prime Minister Viktor Orban moved to tone down the rhetoric against the banks once again on September 17 as he spoke of their importance to the economy and limits to potential taxation upon the sector. However, he also continued to bang the nationalist drum ahead of elections next year and said he still wants lenders to "squeal".
Speaking in parliament, Orban - who has told the banks to agree a plan to aid foreign-currency mortgage holders within the next six weeks - said there are limits to how much burden a "well-functioning" financial industry can bear, reports Bloomberg. "It's good to know that we have our limits: there's no modern economy without a well-functioning banking industry," the PM said. "On the taxing of banks, we have to find the level at which they squeal but still pay and open up the next day."
The comments from the PM will offer the banks renewed hope that they will be able to thrash out a solution to the forex debt problem with the government. The last set of comments from Budapest earlier this month suggested Orban et al were ready to play hard ball and force the banks to shoulder huge losses.
It's notable though that Orban's softened words on the banks came as Budapest announced that it has approved changes to the constitution repealing earlier moves that the EU said it may challenge. The amendments - restricting advertisements during political campaigns and opening the way for Budapest to launch new taxes to cover "unexpected payment obligations" brought on by international court rulings on public finances - were repealed on September 16. The government said the changes were made "so that certain constitutional matters cannot be used as a pretext for further attacks against Hungary going forward".
After suggesting it had no plans to do anything further on the issue, the government shocked the banks in the summer as it announced it plans once again to try to help forex mortgage holders. Earlier initiatives cost lenders huge losses, but failed to help almost half a million borrowers, whose payments soared after forint plunged in the global financial crisis. Hungarian households hold HUF1.81 trillion (€6bn) in forex mortgages. The issue exposes government policy to the markets, and has raised protest against the banks from the population.
"The banking sector, and the market, will hope that Orban's banking sector friendly commentary will now mark another "reset", particularly with foreign owned banks, and that the government will adopt a more moderate approach with respect to the latest batch of proposals to resolve the forex loan problem, and aiming to resolve the problem over 5-10 years," notes Tim Ash. The banks, apparently resigned to the fact they will end up losing money, are trying to negotiate a slower wind out of the forex debt. "If true, this latter resolution will be a market positive," points out the Standard Bank analyst.
However, the banks would do well to note that the softer rhetoric neatly fits the pattern seen since Orban's Fidesz won power in 2010. He's spent his three years in office alternating between thunderous criticism of foreign investors and Brussels, and offers of compromise. That tactic has often worked to bring the markets back from the brink through all the dramas.
Yet while speaking of the banks importance, Orban's November 1 deadline - announced in early September - for the banking association to come up with an "acceptable" solution or face a decision from the government still stands. It's also clear that despite the deep recession last year - worsened by the practical end of lending by the banks and fixed investment - the government's erratic and discouraging policymaking has continued practically unabated.
It's clear that Fidesz is ploughing a populist furrow in the lead-up to the elections. On top of raising spending, it has recently trumpeted its move to eject the International Monetary Fund (IMF) from the country and promised to end the "colonization" of the country by investors and the markets. "All this seems to be working well if opinion polls are anything to go by," suggests Tim Ash of Standard Bank, "and Orban looks set to win a second successive term come April."
William Jackson of Capital Economics says in a report issued on September 17 that while the health of the Central and Eastern European region's banks has improved, they remain fragile in a significant number of countries. As has been the case throughout the last few years, while the likes of Erste Bank Group, UniCredit Group and Raiffeisen Bank International have been suppling capital to their local subsidiaries in Central Europe at a better rate than many feared, Hungarian units have suffered due to high taxes and rough handling. Tier 1 capital and non-performing loans remain a big headache for "countries with extremely fragile banks," Jackson writes, which includes Hungary.
Meanwhile, Orban also increased his calls for increasing Hungarian ownership in the banking sector. It's a goal he seems to hope will be achieved by that same tough treatment by the government, although all the major foreign banks continue to insist they have no intention of quitting the country. The strengthening of OTP - the country's largest lender - is "important" as part of the government's aim to boost local ownership in the financial industry, the PM said.
That echoes recent moves by the government to take over utilities. Budapest is currently in the midst of buying German giant E.ON out of its gas business, and is hoping to create a "national champion" - in an apparent attempt to ape the Russian model - based on state company MVM. A 10% cut to energy tariffs for households is set to be followed by two more similar price reductions ahead of the 2014 vote, with the added bonus of artificially suppressing inflation to allow the central bank to carry on with its long standing easing cycle.
Press reports on September 17 claimed that Budapest has now signed a deal with Hungarian energy giant MOL to purchase strategic natural gas storage assets. Like the E.ON deal, the price the government will pay is undisclosed, although unnamed sources estimate the value of the deal at HUF150bn (EUR504m). The same day, Hungary filed a prospectus with the US Securities and Exchange Commission, which opens the way for it to issue up to $5bn in new debt.
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