Oct. 18 (Bloomberg) -- Hungary’s decision to backtrack on a pledge to cut the European Union’s highest bank tax in half won’t hurt the economy after lenders withdrew financing from the country, Prime Minister Viktor Orban said.
“Banks stopped lending already, the deleveraging project is going on in Hungary,” Orban said in an interview in Bucharest yesterday. “Bank taxation has no impact on Hungarian activity.”
Hungary will keep the levy at its current level as part of a budget plan to avoid a freeze of European Union development funds as a penalty for deficit overruns, the government said yesterday. The International Monetary Fund has urged the country to ease the bank burden to boost growth after squeezing lenders to plug budget holes.
The higher tax may prompt the foreign parents of Hungarian banks to withdrawal capital from the country at an increasing rate, raising the risk of a prolonged recession, Levente Kovacs, secretary general of the Bank Association, said today. Mihaly Patai, the association’s head, will resign if Parliament approves the approved measures, he said.
The EU’s most-indebted eastern member requested aid in November as its credit rating was cut to junk. Negotiations for about a 15 billion-euro ($19.2 billion) loan were delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the Washington-based lender and the European Union.
An agreement with the IMF is “very close,” Orban said yesterday, declining to give a date. He said Hungary doesn’t need money from the IMF and is seeking a credit line as a precaution.
The forint was little changed against the euro after falling as much as 0.7 percent yesterday following Economy Minister Gyorgy Matolcsy’s announcement of steps to improve next year’s budget balance by 367 billion forint ($1.7 billion).
The forint traded at 278.19 per euro by 3:27 p.m. in Budapest. It rose 13.2 percent this year, the most in the world, as investors bet Hungary will obtain aid from the IMF. OTP Bank Nyrt., the country’s largest lender, dropped 2.6 percent to 4,120 forint after plunging as much as 8.9 percent yesterday.
The government will increase a planned tax on bank transactions to 0.2 percent from 0.1 percent, introduce a levy on utility companies’ infrastructure, reduce local-business benefits and raise taxes on employee benefits, Matolcsy said.
Hungary is a “real problem case” for Raiffeisen Bank International AG, Herbert Stepic, the Vienna-based lender’s chief executive officer, said at a conference in the Austrian capital today. “Hungary is our most difficult market.”
Investors have no security for their assets in Hungary, Willibald Cernko, chairman of UniCredit SpA’s Bank Austria unit, told the same conference in Vienna today.
Hungary’s Bank Association is “shocked” that the government reneged on its pledge to cut the bank tax in half, it said yesterday in a statement. The measures endanger banks’ lending capacity, the “predictable financing” of the economy, and a recovery from a recession, it said.
Matolcsy promised that the bank levy will only be extended by one year and will be halved in 2014, Bavarian Finance Minister Markus Soeder told journalists in Vienna today.
“It’s important Hungary does a bit more and rebuilds confidence because they had already promised the same a year ago,” Soeder said.
The measures “cripple any prospects of a medium-term growth rebound in Hungary,” Citigroup Inc. said yesterday. Nomura International Plc said the steps won’t satisfy the IMF and the EU and “hence we are no closer to a backstop at all” for Hungary.
The efforts to control the budget deficit has reduced the economy’s potential for economic growth. The potential growth rate is now near zero, Mihaly Varga, the minister in charge of obtaining an IMF loan, said on Oct. 16.
The tax increases may curb investment, employment and consumption while boosting inflation, the Economy Ministry said in a report on its website today.
Hungary expects the economy to expand 0.9 percent in 2013 and 2 percent in 2014, the ministry said. The government on Oct. 5 had cut its estimate for GDP to a contraction of 1.2 percent in 2012 from a previously estimated 0.1 percent growth and to a 1 percent expansion from 1.6 percent in 2013. The EU will also lower its 1 percent growth forecast, Matolcsy said yesterday.
The EU estimates Hungary’s budget gap will widen to as much as 3.9 percent of economic output in 2013 from the government’s goal of 2.7 percent for this year and next even after measures announced this month, Matolcsy said yesterday in justifying the new measures.
“We have a disagreement” with the EU on the budget, which is “under control,” Orban said. He has previously said that a better-than-forecast economic performance will allow the government to scrap spending cuts, including the decision to postpone an increase in teachers’ pay. Orban faces elections in 2014.
To contact the editor responsible for this story: Balazs Penz at firstname.lastname@example.org