Hungary’s banks reeling after government tax

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Hungarian banks warned that a bank tax put forward by the country's government would only harm the sector, which has proven to be viable even in the worst periods of the economic crisis. EurActiv Hungary reports.

The new Hungarian government, which enjoys an unprecedented majority in parliament (EurActiv 12/04/10), plans to collect 700 million euros a year from banks and insurance companies by introducing a tax on their assets.

Although the idea of a bank levy is gaining ground in EU and global circles (see 'Background'), the Hungarian tax is unique in terms of its size, amounting to 0.6% of a company's assets.

Asked about the planned bank levy, Pierre Labouverie, Belgium's ambassador to Hungary, said today (6 July) in Budapest that his country, which currently holds the rotating EU presidency, was closely following the introduction of the bank levy in Hungary.

Labouverie added that the Hungarian solution was ''different'' from that sought by the Belgian Presidency.

Belgium wants to create a ''buffer zone'' for future crises, while Hungary is using the bank tax to balance the budget and keep the deficit under control, he explained.

Hungarian Economy Minister György Matolcsy admitted last week that the European Union had ''serious doubts'' about the government's proposals.

''The Hungarian bank tax caused a storm in the global business community [...] There’s fear that if Hungary were to introduce a bank tax of this magnitude, then Germany, France, the UK, Romania and Slovakia would follow suit,'' he told Bloomberg.

The Hungarian Banking Association (HBA) said discussions had been held with the government about the bank tax on 16 June, when the banking sector asked for significant amendments to the draft law.

A HBA press release recalls that the Hungarian bank system has preserved stability even during the crisis: it did not need to be bailed out and it secures continued finances for the economy.

The size and the conditions of the planned bank tax would significantly weaken the capital and creditor position of the bank system. On the whole, contrary to the government's expectations the bank tax would have a very negative impact on the economy and would set back economic growth, HBA argues.

Mihály Varga, state secretary at the prime minister's office, said on television last Friday that he hoped the government and the HBA could reach an agreement soon.

Credit institutions have to understand that the stability and the functioning of the economy is a ''common interest,'' he declared.

Varga also hinted that it would be unfair for the banking sector to bear the main burden of the government's efforts to keep its budget deficit within a 3.8% target.

Tamás Bánfi, a member of the Monetary Council, admitted on Monday that the bank tax was ''huge'', but said he did not see any other solution for keeping Hungary on the right economic track.

"At this moment I see no other way to meet the 3.8% budget deficit target," Banfi told Reuters. "Meeting the deficit target is mandatory, because we cannot even estimate the risks of non-compliance."

Economy Minister Matolcsy said on Monday that after parliament had voted to pass the law, its effect would prove that the government was right. He also expressed determination to defend the draft law against attacks from the HBA and from Europe if necessary.

During the meeting of the Monetary Council, the Hungarian National Bank (MNB) also expressed concern about the planned tax. ''It is worrisome if measures taken for securing financial discipline endorse the evolution of other macroeconomic risks,'' it said

The bank fears that the tax may halt economic growth in the short and in the long term, as it diminishes the capital attractiveness and the credit capacity of financial institutions.

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