Economy 20 July 2010, 4:39pm

Hungary Csányi wishes IMF showed bigger flexibility on 2011 deficit goal

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Sándor Csányi, Chairman-CEO of Hungary’s largest bank by assets, OTP, said the markets overreacted the early departure of the IMF/EU teams reviewing Hungary’s fiscal stance. He also urged the international lenders to show larger flexibility on next year’s deficit target, which was one of the issues Hungary was unable to agree on with the IMF/EU missions.

“I don’t see any risk with respect to the economy or the budget that would justify the fall on the markets (on Monday). But we have to accept that markets are much more sensitive now. We have to live with that, at least in the short term," Csányi told local business daily Világgazdaság in a video interview on Monday.

Local assets came under pressure - the forint hit a 14-month low, government securities yields rose sharply and stocks prices dipped on the Budapest Stock Exchange (BSE) - on Monday, after the IMF and European Commission delegations left Hungary early on Saturday over disputes on several issues with local authorities.

Among others the IMF/EU teams lacked clarity on fiscal measures in 2011, were critical of the size of the planned bank tax they consider exaggerated and also of the cabinet’s plan to cap the salary of central bank management, including Governor András Simor. The latter plan got a bitter reception by the European Central Bank (ECB), as well, although the Fidesz party emphasized the measure is not directly aimed at Simor but the public sector as a whole, which makes it okay, even though the international community interprets it as meddling with the Bank’s independence.Csányi also said he talked with members of the IMF and EU teams who wanted to hear his views about the key issues. “I believe they should show a bigger flexibility towards next year’s deficit target," he said.

Csányi said he accepts that the lenders are adamant on the 3.8% of GDP deficit target for 2010, but he believes that achieving the 2.8% of GDP goal next year “would require measures that would hurt the real economy." He said this would be detrimental for the budget already in the medium term.The government hopes to achieve the 3.8% of GDP deficit target (set by the previous administration) this year by imposing a new tax on the financial sector to raise HUF 200 bn in revenue. The surcharge will affect banks, insurance firms and leasing companies.

The tax, if approved in its current form in Hungary's parliament this week, will be levied at 0.45% on banks' adjusted total assets at the end of 2009.

"Naturally, we aren't happy about the tax but it's of extreme importance for me how Hungary's risk assessment [among investors] and risk premiums develop," Csányi told The Wall Street Journal on Monday.

"Keeping the budget deficit goal is of prime importance since we [OTP] are the first to feel it when market confidence in the country disappears," he added.

Csányi said the tax should only be imposed for a strictly limited period of time; to retain it longer than two years would hurt economic growth. The IMF and the EU believe the government should aim for smaller revenues from the tax already in 2011 and phase it out by 2012.

"[...] when banks must decide about capital and liquidity allocation, the parent banks could decide to put their money elsewhere [rather than Hungary]," Csányi told the WSJ.

He noted that the Hungarian bank sector's profitability is expected to fall around 15-20% this year even without the extra levy, partly because of the weaker business climate, and partly because of the impact of regulatory investigations that have forced banks to increase loan loss provisions.