Hungary Pledges Not to Tie Bank Tax Cuts to Lending -- For Now

  • Government to assess in 2016 whether banks expand credit
  • OTP Bank shares drop 1.3%, paring this year's gain to 49%

Hungary’s government will hold off on making bank-tax cuts conditional on lending from 2016 to see whether credit expands without that requirement, Economy Minister Mihaly Varga said.

It will probably take “a few quarters” to see whether the plans to lighten the tax burden will encourage banks to boost credit, Varga told reporters after a conference in Budapest on Wednesday. He didn’t rule out placing conditions on tax cuts later.

“We can’t pass tax cuts saying that we know in advance that lending won’t rebound,” Varga said. “We have to wait and see what happens. If lending doesn’t expand after we’ve cut the bank tax, then that’s the point at which the government has to deal with this issue.”

The planned tax cut would help Prime Minister Viktor Orban’s government repair frayed ties with the financial community after imposing Europe’s highest bank tax and forcing lenders to bear most of the costs tied to conversions of Swiss franc loans. The reduced levies are also part of a plan to ward off an economic slowdown by giving banks incentives to boost lending.

EU Objections

Shares of OTP Bank Nyrt., Hungary’s largest lender, fell 1.3 percent to 5,675 forint by 1:05 a.m. in Budapest. The stock has risen 49 percent this year as Orban pledged to cut the tax on the industry.

The cabinet will have to modify some clauses in the legislation which sets the lower tax burden because of objections from the European Commission, Varga said. The EU executive’s objections relate to tax breaks for companies that boosted lending during the economic crisis and those which suffered losses in Russia and Ukraine.

The government will also shortly announce measures, including guarantees on some loans, to complement central bank steps to boost lending, Varga said. The government is still negotiating with Erste Group Bank AG to obtain a stake in the lender’s Hungarian unit, he said.

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