The government is mulling a rethink of its sectoral tax on banks, National Economy Minister Mihály Varga has said. He told public broadcaster Kossuth Rádió: “I don’t exclude the possibility of revising or rethinking the banking tax, since banks are going to be assuming a heavy burden to compensate clients, but now is not the time for this.”
Varga noted that the European Union had told Budapest it should phase out sectoral taxes such as the banking one, adding however that the taxes are part and parcel of government efforts to stabilise the country’s economy. “I do not believe that we should accept Brussels’ position concerning this issue,” he said, rejecting scrapping the tax outright.
Antal Rogán, leader of the ruling Fidesz party’s parliamentary group, told HírTV last weekend that in December banks must convert foreign-currency mortgages into forints. The conversion would be around EUR 11 billion worth. He added that the government may consider assuming some of the costs. Parliament last Friday approved a law for compensating troubled forex borrowers, which, the central bank estimates, could cost the financial sector HUF 600-900 billion.
Loan repayments in forints will be “significantly lower” than those for foreign currency-denominated loans, Varga said, noting that banks are expected to calculate in September and October how much borrowers should be repaid, as well as to set the instalments in forints borrowers will have to pay for the remaining portion of their loan.
In the given period, banks would calculate the difference between exchange rates they had applied for the disbursement and repayment of loans, and the mid-rate of the central bank. Clients would also be reimbursed for extra amounts banks had collected through unilateral changes to the loan agreements, Varga added.
According to the minister, the proposal by the Banking Association, under which an exchange rate cap would be applied to all forex loans, was “not a good idea”. Clients should “feel that the issue has been settled in a fair way: either through lower instalments or an amount credited to their account”. Both the way of reimbursing clients and the conversion of loans into forints would be governed by laws to be enacted in autumn. Varga declined to put a value on the refunds, saying it was too early to tell.
OTP Bank expects to pay about HUF 27 billion in refunds, the lender said. Taking into consideration provisions the bank has already made, the total negative impact of the refunds, before tax, is expected to be about HUF 25 billion, which will be booked in the second quarter of 2014. The impact is about HUF 20 billion more than earlier estimated, it added. “OTP Bank is still of the opinion that in its lending practice it maximally abided by all the relevant rules and regulations,” it said.
A smooth solution to Hungary’s foreign exchange mortgage debt issue may prompt the central bank to cut its policy rate to sub-2% territory, London-based emerging markets analysts say. Economists at BofA Merrill Lynch Global Research said their central scenario for monetary policy sees a final cut to 2.25% assuming that the FX loan dispute keeps investor sentiment jittery. However, should the issue resolve smoothly, with average inflation at zero this year and below target again next year, “we see the policy rate falling to 1.80% by year-end”.
“We don’t expect a large haircut at conversion since the courts, in our interpretation of the rulings, did not find the concept of an FX loan illegal, thus adding a further haircut to the household debt would go beyond the courts’ recommendations,” the analysts said. However, “if we are wrong and a sizeable haircut of household debt is introduced for the conversion, we anticipate two major consequences (…) First, the retail borrowing cost for new loans will rise, which de facto will negate the benefits of further NBH easing. Secondly, it will likely take off the table an upgrade back to investment grade status as rating agencies will see this move as uncalled for.”
The approval of a law based on the Supreme Court’s legal uniformity ruling on foreign currency-denominated loans may open a new era of fair banking, Prime Minister Viktor Orbán said last Friday. Orbán called the move of “historic importance”. From now on “people will see that it is not always the stronger party that is right”, he said. “The weak can also be right, with the law and justice on their side.”