This was the beautiful backdrop when Prime Minister Viktor Orbán and EBRD president Suma Chakrabati signed
the letter of intent, which will be far more significant than
the acquisition of the 15% ownership in Erste Bank Hungary
The headlines always seem to be the same: the state buys up the top institute in the savings sector (Takarékbank), buys up MKB and BB, and now it is buying a stake in Erste Bank as well. However, something else happened this month, something not about acquiring ownership. Did Viktor Orbán just sign a peace agreement with the president of the European Bank for Reconstruction and Development?
A memorandum of understanding, a letter of intent, has been published in a kind of ashamed way – only available in the English language as an attached document – on the government portal kormany.hu. All this while everyone was busy understanding that the Hungarian state is buying a part in the Hungarian branch of Erste Bank.
At least everyone seemed to be busy with that, since Prime Minister Viktor Orbán did not waste a word on explaining this letter of intent. However, it was not exactly like that, since he made a quite important announcement in all the media about the special tax on the banks being drastically reduced from 2016.
Upon questioning he even mentioned a specific number: the state will renounce HUF 60 billion income from special taxes just in 2016. This was sufficient to put the stock market actors into frenzy. The Croesus of the branch, OTP Bank, improved ten percentage points within a couple of hours starting from a deep dive, and the number of contracts multiplied.
The investors had just received tangible arguments for buying bank shares. In the aforementioned letter of intent the government committed to quite a number of things.
No further measures with negative consequences for the banks
The state will stop seeking majority shares in financial institutions in the future. (There can be exceptions, such as when bankrupt banks need to be saved, if without the governmental intervention the stability of the financial system as a whole would be endangered.)
The previously announced intent, according to which the majority shares owned in banks today will be privatised again within three years, was affirmed. The other commitments will be fulfilled by the application of sector-specific legislation.
The exchange of foreign-currency loans into HUF will need to happen in such a way that the exchange rate risk cannot be transferred to another financial institution. This legal formulation means for the banks that the benefits provided by the law to mortgage loan borrowers may not be passed on to other borrowers.
It’s not something new that the government is not helping out those who decided financing their car in Swiss francs and later on had to learn the hard way what usury means. However, the politicians have not put this decision in writing as of yet. There are further commitments documented as an intent, too.
This way the handling of the bad credits will happen according to the international “Best Practice”. This promises transparency and market-friendly solutions, which is again beneficial for the banks. Moratoriums preventing foreclosures for instance can hardly be regarded as market-friendly solutions.
The state taking over the handling of the problematic real estate on the other hand seems much more fitting to the intent. In this spirit, the introduction of the private insolvency for families, forced by the minority governing partner KDNP, could not have happened without consulting with the bank alliance and even not without its support (!).
The government will not take any measures in the future that would have negative consequences on the profitability of the banking sector. There is an exception here, namely the implementation of EU measures, which is quite natural in an EU member state.
Apart from this necessity, the last promise is really nice to hear. In addition, the government promises a fair competition and equal treatment to the actors of the market!
Special tax for banks will be reduced in three phases
Finally, we can read about the specific method and way of the reduction of the special tax on the banking sector. The rate of 0.53% applied on the balance sum from 2009 onwards is to be reduced to 0.31% from 2016, where the basis of taxation will be the balance sum from the end of 2014.
This is another important change, since the balance sheets were quite puffed up because of the credit boom just before the financial crisis. In addition to the disastrous consequences of the crisis itself, the interventions of the government such as the final repayment of the foreign-exchange loans have resulted in quickly shrinking balance amounts.
The ballast of the special tax laid on the result of 2009 pushed the banks more and more into the red numbers. The sector was burdened with about HUF 150 billion this year, which will be around half of this amount for 2016 according to Orbán’s words.
However, that is not all; the tax rate will be further decreased by the beginning of 2017 to 0.21%. This special tax will be kept for another two years, before Hungary will finally be ready in 2019 to adjust the special taxation of banks to the EU norms. These are a lot of intents, which need to be laid down as a legal norm by June in the case of the modified special taxation of the banks.
EBRD must break the ice
What happened exactly? Apart from signing a document, which cannot be read let alone understood by 80% of the citizens of the country? Oh yes, the state wants to acquire 15% in Erste Bank Hungary Zrt.
Even Mihály Varga, Minister of National Economy, has no idea yet how much the most recent adventure of the Orbán government in the banking sector will cost for the taxpayers. After all, he is not a chartered accountant, as he said on the public television channel m1.
They mentioned about HUF 10-20 billion as a “fair” price for the share. If this sum will prove to be reasonable upon finishing the screening of the company, Varga said the transaction will prove to be profitable both for the state and the European Bank for Reconstruction and Development (EBRD). However, he will let the accountants do their job first until the end of May.
Austrians know that the CEO of Erste Group, Andreas Treichl, would never have allowed the Hungarian state to own a share in their subsidiary unless the EBRD was part of the deal. After all, in the past few years banks were considered as the worst kind of multinationals in the eyes of the freedom fighter called Viktor Orbán.
It was not a coincidence that EBRD president Suma Chakrabati announced at a press conference that the Hungarian government has fully understood the necessity to provide a business-friendly environment in the financial sector. They have named branch-specific issues and urged for transparency and accountability in cooperation with the Hungarian authorities.
The following sentence sums up the quintessence of the attitude in the international financial circles: “Restoring trust is maybe the most difficult task during the transformation of the economy.” The EBRD had its own reason for participating in the tri-lateral deal, namely that the Hungarian banking sector will profit from having strong private actors in the future as well.
Budapest Bank sale signed, price talks in final stage
Corvinus Nemzetközi Befektetési, a unit of state-owned Hungarian Development Bank (MFB), has signed a contract to purchase Budapest Bank from General Electric Capital Group, Corvinus and MFB have announced. They said the transaction could include all the assets and all the units of Budapest Bank, and it would be financed from a loan granted by MFB and guaranteed by the state. A state guarantee for the Budapest Bank share purchase was put at no more than USD 700 million in a decree published in the official government gazette. Minister for National Economy Mihály Varga told commercial news channel HirTV that talks on the final price of Budapest Bank were still under way but confirmed that it would be “no more than” USD 700 million. Under an agreement signed with the European Bank for Reconstruction and Development, the state would sell its shares in MKB, Budapest Bank and Erste Bank to a private investor within three years, Varga said.
