Hungary banks want special tax ended soon

By Marton Dunai

BUDAPEST (BestGrowthStock) – Hungary’s special bank tax, passed into law in parliament on Thursday, could drive 8-10 banks into the red this year so it must be phased out by 2012, the country’s top banker said after the vote.

“The rate of the tax is brutal for the banking system,” Hungarian Banking Association chief Tamas Erdei told Reuters.

“I can imagine that 8 to 10 banks will report losses at the end of the year. That will reduce their capital position, affecting the whole economy negatively.”

The government wants to raise 187 billion forints ($834.4 million) from the tax to help plug the holes in the 2010 budget and bring the deficit down to 3.8 percent of gross domestic product, as agreed with international lenders.

The International Monetary Fund and the European Union mandated the deficit reduction after they bailed Hungary out with a $25.1 billion emergency loan in 2008.

The tax is levied on most financial institutions. It requires banks to pay 0.5 percent on most of their balance sheets, or a sector total of 120 billion forints, in 2010. A sum of 36 billion will fall on insurers and 30 billion on the rest of the financial sector.

An additional 13 billion forints had already been penciled in for the financial sector in the 2010 budget.

“There is nothing we can do in 2010 but accept the tax,” Erdei said. “But in 2011, the tax must shrink substantially, and by 2012, it must be reduced to the European levels. There, the tax is 0.04 percent or 0.05 percent of balance sheet total.”

The government earmarked revenues of 200 billion forints from the tax for 2011 as well.

“Of course we’re not in a bazaar in Istanbul to bargain,” Erdei said. “The government must understand that this burden, if sustained too long, will conserve a very restrictive bank behavior.”

He said reduced profitability and slower lending will ultimately lower the price tag of Hungarian banks, exposing them to takeovers.

“The effects of the bank tax are clearly negative and we absolutely do expect a market reshuffle in Central Europe within the next year or two.”

He confirmed earlier reports his own bank, MKB Bank, the local subsidiary of Germany’s Bayern LB (BAYLB.UL: ), was not for sale at this time.

DEALING WITH BAD DEBT

Erdei said a government plan to incorporate bad loans into a state-run asset management company was vital, because banks could not handle all of the troubled mortgages that have accumulated due to heavy borrowing and the financial crisis.

He said there could be as many as 100,000 families facing insolvency because of bad loans, which makes for an impossible situation because that many people cannot be evicted.

If the state is willing to buy the troubled assets, the banks would have to take a discount, he added, but said the transaction cannot be directed to compensate the banks for the extra tax.

“I see no correlation,” he said. “The goal cannot be to make up for bank losses.”

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(Reporting by Marton Dunai; editing by Andre Grenon)

Hungary banks want special tax ended soon