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Hungary Recognizes Limits to Taxing Lenders, Premier Orban Says

Hungarian Premier Viktor Orban, whose plan to aid foreign-currency mortgage holders threatens to impose losses on banks, said there are limits to how much burden a “well-functioning” financial industry can bear.

The strengthening of OTP Bank Nyrt., Hungary’s largest lender, is “important” as part of the government’s aim to boost local ownership in the financial industry, Orban said in Budapest today. Lenders will continue to pay a bank tax exceeding the European average, he said.

“It’s good to know that we have our limits: there’s no modern economy without a well-functioning banking industry,” Orban 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.”

Orban has relied on extraordinary taxes on the industry to keep the budget deficit in check. Facing elections in 2014, he is now pressuring banks to take on the cost of converting foreign-currency mortgages into forint and reduce monthly payments as he seeks to “eliminate” household foreign-currency loans.

OTP shares rose 1.4 percent immediately after Orban’s comments and traded up 0.1 percent from yesterday at 4,392 forint by 12:16 p.m. in Budapest. The forint fell 0.1 percent to 299.3 per euro.

Banks in Hungary lost $1.7 billion during a 2011 program that allowed the early repayment of foreign-currency mortgages at below-market exchange rates. Lenders reacted by pulling out capital equal to 23 percent of gross domestic product and cutting new credit. The government has given banks until Nov. 1 to work out a solution for borrowers.

Failed Initiatives

Orban is promising to help mortgage holders after earlier initiatives failed to help almost half a million borrowers, whose payments soared after forint plunged in the global financial crisis. Hungarian households hold 1.81 trillion forint ($8.1 billion) in foreign-currency mortgages and an additional 1.68 trillion forint in home-equity loans denominated in currencies other than the forint.

Today’s comments by Orban, who has pledged to avoid the 2011 “Blitzkrieg” against banks this time around, may signal that the government may be ready to spread the cost of converting foreign-currency mortgages over time, which would be “market positive,” Timothy Ash, a London-based analyst at Standard Bank Group Ltd., said in an e-mail today.

“The banking sector, and the market, will hope that Orban’s banking-sector friendly commentary will now mark another ‘reset’ with banks, and 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 FX loan problem in Hungary,” Ash said.

One-Time Conversions

Hungary’s central bank agrees with commercial lenders that the country should avoid the one-time conversion of foreign-currency mortgages to safeguard financial stability, Magyar Nemzeti Bank President Gyorgy Matolcsy said on Sept. 11.

Central bank Vice President Adam Balog has proposed fixing installments at below-market exchange rates and freeing borrowers from the capital repayment of the difference with the market rate. That would in effect eliminate the exchange-rate risk for borrowers while spreading its cost over the maturity of the mortgages.

OTP competes mostly with international banks including UniCredit SpA, KBC Groep NV, Erste Group Bank AG, Intesa SanPaolo SpA and Raiffeisen Bank International AG, which control three-quarters of Hungary’s banking industry.

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