Hungary retreats on central bank tax, but unlikely to unlock loan talks

By bne IntelliNews October 8, 2012

bne -

Hungary announced on October 5 that it is ditching its controversial plan to extend the new financial transaction tax to operations of the central bank. Coming after months of tussle, the move spearheads a surprisingly conciliatory mood from Budapest, accompanied as it was with a raft of additional austerity measures, but it may not be enough to tempt the International Monetary Fund (IMF) back to the negotiating table.

Speaking at a press conference, Economy Minister Gyorgy Matolcsy - the main architect of the Fidesz government's "unorthodox" economic policy - said that due to objections the 2013 budget does not include revenue from applying the transaction tax on the Magyar Nemzeti Bank (MNB). "Our partners raised objections against [it]; what's more, the European Commission flagged a possible infringement procedure against Hungary," Matolcsy said, according to Reuters. "Therefore, in the budget we no longer reckon with the transaction tax levied on the central bank."

The government plans to raise up to HUF320bn next year from the new tax, which will be levied on everyday financial transactions carried out by commercial banks and the treasury. However, riskier trading activities will not be subject to the charge.

The issue of applying the new tax to MNB operations had become the main stumbling block in talks with the IMF over securing a new loan programme. MNB Governor Andras Simor claimed earlier this year that the plan would reduce the independence of the central bank. That same concern - on the back of a (now amended) central bank act - delayed opening the negotiations for eight months, before a first round kicked off in August. However, the IMF repeated that it has not yet set any date to resume talks.

However, the independence of the central bank appears questionable anyway, with the revised structure of the monetary policy council - giving it three internal members and four government-appointed members - starting to take effect. The MNB surprised the market in late September with a second consecutive cut in benchmark rates, despite continued warnings from Simor of the risks that it would pose to inflation and the forint.

Meanwhile, external members of the council have said Hungary is starting on a cycle of monetary easing, suggesting more cuts could follow. The government has been at loggerheads with Simor for months as it has pushed for cuts to the highest benchmark rates in the EU in order to stimulate an economy back in recession.

Yet the decision to abandon the plan to tax MNB operations is no small climbdown given the rambunctious statements from Prime Minister Viktor Orban on the topic over the months. The volatile government appears to be in a conciliatory mode for the meantime, with Matolscy also announcing additional measures to shore up budgetary targets, which has been another concern of the IMF.

Whether that suggests Budapest is really serious about finally clinching a bailout deal with the IMF remains uncertain however, with the new measures following hot on the heels of Hungary's rejection of demands concerning key policy compromises.

At the same time, although it clearly raised hopes in the market - the forint gained close to 1% in morning trade following the news - at the same time analysts suggest the deficit is still set to come in around HUF100bn over target in 2013, which will hardly have the Washington institution rushing to board a plane to Budapest to resume talks. Some suggest that the EU - which has threatened to halt cohesion funds to Hungary unless the country cuts its deficit below the 3% threshold for the first time since it joined the bloc in 2004 - is the real target of the austerity measures.

Either way, to compensate for the loss of revenues stemming from the central bank exemption, as well as an economy set to perform less well than expected, the minister also announced new austerity measures to help bring the budget deficit gap below the targeted 3% of GDP. Matolcsy said the government will freeze HUF133bn in spending in 2012 and cut the deficit by another HUF397bn next year. The tax on state treasury transactions and cash withdrawals from banks will be raised, while Hungary will cut back on co-financing of EU projects and delay a planned hike in teachers' wages. Matolscy also announced a target of HUF120bn in extra revenue as a result of tightening tax collection, and HUF51bn from abolishing a ceiling on social security contributions that will affect higher income earners.

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