Symbolic Hungary deal ends ‘hostile’ attitude to banks

By:
Lucy Fitzgeorge-Parker
Published on:

Hungary’s government commits to reduce bank taxes, while a proposed stake in Erste Bank shows ‘we’re all in the same boat’, says the minister behind the plan.

Hungary’s government is hoping that a 'symbolic' agreement with the European Bank for Reconstruction and Development (EBRD) on  banking sector policy will reset relations with the international community.

Suma_Chakrabarti-large
EBRD president
Suma Chakrabarti

In a Memorandum of Understanding (MoU), signed on February 9 by prime minister Viktor Orban and EBRD president Suma Chakrabarti, the government committed to reduce bank taxes, dispose of two lenders acquired by the state in the past year, work with the sector to resolve bad debts and 'refrain from implementing [unilateral] new laws or measures that may have a negative impact on the profitability of the banking sector'.

The two signatories also announced plans to take a 15% stake each in the Hungarian subsidiary of Austrian group Erste, the country’s second-largest lender. 

That represents a big departure for the the Fidesz government. Since coming to power in April 2010, the administration has missed few opportunities to extract political capital and budget revenue from banks, introducing  swingeing levies, imposing hefty penalties for foreign currency mortgages and insisting on 50% domestic ownership of the banking system.

Financial policy minister Gábor Orban, the main architect of the new agreement for the government, says it reflects policymakers’ recognition that the ongoing standoff with the banking sector was damaging Hungary’s international relations and reputation. 

"It has been weighing on all our other relationships, with European governments, with the European Commission, with the IMF, with the international financial community and with international investors," he says. 

"The rating agencies have also justified Hungary’s unjustifiably low ratings by citing the government’s so-called hostile attitude to the banking sector as a whole, as well as questioning the sustainability of our growth figures based on the heavy tax burden on the financial sector."

Attitude

Orban insists the problem was not so much about the level of bank taxes as about "the general attitude problem, hostility and lack of confidence". 

"It was partly symbolic," he says, "which is why it had to be resolved in a symbolic way, by bringing the EBRD here and having them endorse the government’s plans to turn the page and commit to an improved operating environment for the banks."

Jean-Marc Peterschmitt, head of central and southeastern Europe at the EBRD, agrees that the bank was able to play a valuable part in mediating between the two sides in the standoff. "We had a situation where the government wanted the banks to engage, the banks were ready to engage but wanted a supportive climate – and an international financial institution that could help rebuild trust and provide additional credibility to joint commitments," he says.

The deal was broadly welcomed by analysts. "It looks as though we are seeing a certain intellectual turnaround in the Hungarian government," says Gunter Deuber, head of CEE research at Raiffeisen Bank International. "Policymakers seem to have realized that they need the financial sector and are ready to reengage with it, particularly as they have an increasing influence over it. This is very much a symbolic move and can be seen as part of the government’s new focus on regaining its investment-grade status."

Symbolism is also the rationale for the government’s decision to take a minority stake in Erste’s Hungarian operation, Orban adds. "We have been conducting negotiations with a number of banks that were looking for guidance on the future, as whether they should stay or go, buy, sell, grow or remain defensive," he says. "Erste was the bank which was most open to exchanging gestures by letting us take a stake in return for our new commitment to the banking sector."

Negotiations for the sale of Erste’s stakes are underway and are expected to be completed within the next six months. Orban notes that the acquisition will give the government no operational control. "It’s a purely financial investment, but it shows that we are in the same boat, our interests are aligned, and we care about the success of the banking sector."

Further reading
Gabor Orban, Hungary finance minister
Gábor Orban interview: 
Hungary tells banks: shape
up or ship out

Orban also stresses that this is a one-off deal, pointing to the government’s commitment in the MoU to refrain from buying further stakes in systemic banks. He is slightly vague, however, as to how the government plans meet its commitments to sell within three years MKB Bank and Budapest Bank, acquired from BayernLB and GE Capital respectively last year.

"We haven’t focused on how that will work because we are more concerned about how we get there and how we make those banks fit for sale," he says. "The point is that this is a clear statement that the government understands it is not fit to run a bank and did not buy these assets to hold them for ever. There was no private-sector buyer for these banks and we didn’t want a disorderly exit, so the government bought them as a last resort, but only as a temporary measure."

In theory, the challenge of finding buyers for MKB and Budapest Bank – currently under the control of the central bank and the prime minister’s office respectively – could be exacerbated by the need to maintain the minimum level of 50% of domestic ownership in the sector, which was achieved with their purchase.