Discretion, the saying goes, is the better part of valour. The Hungarian government would do well to ponder the meaning of that phrase after a hapless few months in power that has not only seen it single-handedly wreck its own country’s fiscal credibility but also endanger that of much of the rest of emerging Europe. Prime minister Viktor Orban’s Fidesz party won a famous electoral victory earlier this year, securing a two-thirds majority that gives it the right to make sweeping constitutional changes, but its performance on the economic front so far has been infamously gauche.
Having first spooked markets with talk of Greece-like fiscal and debt repayment problems, abandoning talks with the European Union and the IMF, the country’s principal economic sponsors, over the continuation of a €20 billion bailout package looks increasingly reckless. Small wonder that the Hungarian forint has been the world’s worst-performing currency against the euro in the past three months.
Looking beyond Hungary’s relationship with its official creditors there’s also the thorny issue of the government’s relationships with foreign bank lenders that play an important role in the economy. While the Fidesz administration’s proposed bank tax will curry favour with the anti-banking lobby at home that feel that international lenders have profited from Hungary’s economic misfortunes, the fact that it is three times larger than levies proposed in other parts of Europe and elsewhere will do nothing to encourage foreign banking players to put precious capital to work.
The tax, to be levied at 0.45% of banks’ assets at the end of 2009, would supposedly bring in revenue equal to 0.5% of GDP annually over the next three years. That compares with the US plan for a 0.15% tax on liabilities and the UK’s proposed levy on balance sheets that would peak at 0.07%. Small wonder then that it has drawn a furious reaction from the European Banking Federation, whose members include long-time supporters of the country including Erste Bank and Raiffeisen International that now face extra bills of €40 million and €35 million respectively for the so-called privilege of operating in Hungary.
OTP Bank, the country’s biggest lender and a mainstay of the economy, faces the prospect of ponying up Ft35 billion ($156 million) in the first year of the levy alone – equivalent to 18.5% of the bank’s average annual net income over the past five years. And that after repaying a Ft400 billion government loan it received in 2009. So much for virtue bringing its own reward in terms of financial rectitude.
What’s more, although the bank tax is a cornerstone of the government’s plans to meet the budget deficit target of 3.8% of GDP in 2010 allowed by the IMF, the Washington-based supranational itself believes it will have a large negative effect on the economy and will not solve Hungary’s fiscal problems. So it’s a tax that pleases only the strident anti-capitalist lobby, upsets virtually everyone else and is practically doomed to failure as a stopgap measure for more sustainable, less distortive fiscal policy. A discreet rethink would surely be the brave thing to do.
