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.
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.”
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.”
|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.
Orban acknowledges that the two lenders, either as separate assets or amalgamated into a single entity, will have to be sold locally – however, he also hints that the 50% target, formerly a flagship policy of prime minister Viktor Orban’s, could be interpreted more flexibly in future.
“It’s not really a hard threshold, given that it’s difficult to know how to calculate the share of domestic ownership,” he says. “It has a more symbolic aspect. It represents the feeling that the banking sector was too reliant on foreign capital and foreign funding, and that we were uncomfortable with decisions being taken outside the country. That feeling has now gone, as the prime minister made clear in the press conference [for the signing of the MoU], and it’s time to take a different approach.”
Orban insists that this new policy of non-intervention is compatible with recent statements by Hungarian policymakers expressing a desire to see fewer big banks in Hungary. “There are too many banks here, in the sense that too few of them have sufficient scale to be profitable, but in this new context I hope that the market can act as a driver for further consolidation.”
As he notes, this may be more likely if valuations of Hungarian banks continue to strengthen as they did in the wake of the deal’s announcement, when shares in national champion OTP Bank jumped by close to 10% in two days. “Improving valuations mean some banks might now be less reluctant to dispose of their assets while others might be prepared to bid higher in the improved operating environment,” says Orban.
Policymakers are also hoping that the new agreement will encourage banks to reverse drastic deleveraging in Hungary, where sector-wide exposure has been cut by more than 40% since the financial crisis – a problem that Orban admits has been partly of the government’s making.
“Banks haven’t wanted to allocate capital to grow in Hungary because they didn’t see it as a profitable market, partly because of the banking tax and partly because of a lack of confidence in the government’s willingness to allow banks to make a profit,” he says. “With this deal, that kind of confidence should return and it will become a competitive disadvantage to be a sceptic.”
The EBRD is also hoping that the agreement will stem deleveraging, which Peterschmitt says has made it difficult for the bank to fulfil its mandate to support corporates and SMEs in Hungary in recent years. “We were finding there was less and less appetite from banks to work with us in this respect,” he says. “We were prepared to provide support, but the opportunities to do so were very limited.”
Orban insists, however, that a reset of relations with the banks was not possible until this year as the government’s key objectives – 50% domestic ownership of the sector, the conversion of all foreign-currency mortgages into forint and a noticeable improvement in Hungary’s national finances – had not been achieved.
“When we took over in 2010, the budget was in a disastrous shape and fiscal credibility took time to restore,” he says. “We are only now for the first time in a position where we can consider reducing some of the extraordinary revenues. As a result, there is there is no longer a hindrance to striking this peace treaty with the banking sector.”
Under the terms of MoU, the government has committed to reduce the banking tax in two steps starting in 2016 to a level “aligned with the prevailing European Union norms” by 2019.
Orban vehemently rejects suggestions that, in light of the depredations of recent years, banks may take time to be convinced of the government’s good faith.
“The prime minister is the most heavyweight personality in Hungary, and if he signs a document and gives a commitment in a press conference, then that commitment will be met. Similarly, if the EBRD flies in from London to sign off on such an agreement, that endorsement should be sufficient for all parties.”
Peterschmitt acknowledges that, by doing so, the EBRD has put its reputation on the line but insists that the potential upside of the deal makes it a risk worth taking. He notes that the fact that the interests of all parties are aligned also makes it “an agreement we can realistically count on”.
He adds: “We were initially uncertain about whether this agreement was something we wanted to pursue, but following negotiations we emerged with a strong conviction that this is a landmark agreement that signals a real change in the sector. It is a unique structure, but it would be fair to say that it is a response to a fairly unique environment.”
Deuber notes that the EBRD also has “a certain leverage” over governments within its sphere of operations. “Countries such as Hungary are dependent on the EBRD in a wide range of areas and it wouldn’t make sense to antagonize them,” he says.
Nevertheless, he adds, the agreement does represent a directional bet by the bank that the worst is over in Hungary in terms of policy actions and that the government is committed to a supportive stance. “If that turns out to be wrong, it could find itself stuck in a very challenging transaction,” says Deuber.