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Hungarian Lawmakers Approve `Brutal' Bank Tax Defying IMF, EU Criticism
Hungarian lawmakers approved a bank tax three times larger than levies proposed elsewhere in Europe, defying criticism from international institutions.
Prime Minister Viktor Orban anchored his plan to meet this year’s budget deficit target on the tax, drawing the ire of the European Banking Federation and lenders such as UniCredit SpA of Milan and Erste Group Bank AG of Vienna, which own local banks. Hungary’s parliament, where Orban’s party has a two-thirds majority, passed the bill today by a vote of 301 to 12 with one abstention.
“It is unacceptable, with common sense, to respect banks as sacred cows at a time when a global crisis that started from the banks happens to be sweeping over the world,” Orban told lawmakers today in Budapest. “The bank tax is necessary, fair and effective, because it serves the interests of the country and the people in a very difficult situation.”
The vote came five days after the International Monetary Fund and European Union suspended their review of Hungary’s 20 billion-euro ($25.8 billion) emergency bailout without backing the government’s budget plans. The IMF said a number of issues remained unresolved, including the bank tax, which would “adversely affect lending and growth.”
The forint, the world’s worst-performing currency against the euro in the past three months, fell 2.9 percent July 19, the first trading day after the talks broke down. It rose to 283.46 as of 8:41 p.m. in Budapest from 284.54 late yesterday.
‘Credibility Slippage’
“We are likely to see further credibility slippage” as a result of the bank levy, Peter Attard Montalto, an analyst at Nomura International Plc in London, said yesterday in a note to clients.
The bank tax is part of Orban’s 29-point program, announced on June 8, which includes spending cuts, reductions in corporate and personal income taxes and limits on the pay of public workers, including central bank President Andras Simor.
Hungary seeks to raise 187 billion forint ($837 million) through the tax on banks, insurers and other financial-services companies to meet the deficit target. The government, which failed to agree with lenders on terms of the tax, plans to keep it in place for three years.
The tax will be levied at 0.5 percent of banks’ assets over 50 billion forint at the end of 2009 after the government raised it from an originally planned 0.45 percent with an amendment today. That compares with the U.S. plan for a 0.15 percent tax on liabilities and the U.K.’s proposed levy on balance sheets that would peak at 0.07 percent.
‘Large Negative Effect’
“The bank tax, which is three times larger than any other similar tax planned in Europe, could have a large negative effect on the economy and it will not solve Hungary’s fiscal problems,” Christoph Rosenberg, head of the IMF’s mission to Hungary, said in a July 18 interview. The IMF would like to see “durable and non-distortive measures.”
The government, which faces local elections Oct. 3, has rejected imposing further austerity measures to narrow the deficit.
Hungary’s plan for the “brutal” tax “caused a storm in the global business community,” Economy Minister Gyorgy Matolcsy said in a July 2 interview. “There’s fear that if Hungary introduced a bank tax of this magnitude, Germany, France, the U.K., Romania and Slovakia will follow suit.”
OTP, Erste, Raiffeisen
The tax will cost Budapest-based OTP Bank Nyrt., Hungary’s largest bank, as much as 35 billion forint in the first year, Chairman and Chief Executive Officer Sandor Csanyi told the Wall Street Journal on July 19, before today’s amendment raised the rate. That’s equivalent to 18.5 percent of the bank’s average annual net income over the past five years.
Erste would have to pay about 40 million euros, and Vienna- based Raiffeisen International Bank-Holding AG about 35 million euros, the two banks told Bloomberg, based on the 0.45 percent tax rate.
OTP has underperformed European peers since the tax was announced June 8, gaining 3.7 percent compared with a 12 percent increase in the 54-member Bloomberg Europe Banks & Financial Services Index.
The European Banking Federation called for “profound modification” of the tax, saying the “discriminative” levy would cause losses at some lenders and hamper economic growth. The Hungarian central bank said the tax would hurt growth prospects “considerably” by stifling lending.
‘Cause for Concern’
“It is a cause for concern if measures taken in order to restore fiscal discipline help raise other macroeconomic risks,” the Magyar Nemzeti Bank said July 5.
Banks in Hungary required less government aid during the global financial crisis than those in some other EU countries.
OTP in March repaid the last of the 400 billion forint ($1.8 billion) government loan it received in 2009. By comparison, U.K. taxpayers pumped 45.5 billion pounds ($69.4 billion) into Royal Bank of Scotland Group Plc, which is now 83 percent-owned by the state.
“This can create further market turmoil,” Diana Gesheva, an economist at 4cast Ltd. in London, said yesterday in an e- mailed note about the bank tax.
To contact the reporter responsible for this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net
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