Economy 7 April 2016, 3:21pm

Hungary to settle 'asphalt case' out of court with EU - Lázár

Portfolio

Hungary’s Economy Ministry does not support the idea of lowering the personal income tax rate next year and the country managed to settle the so-called ‘asphalt case’ with the European Commission outside court, the Prime Minister’s cabinet chief told journalists on Thursday.

János Lázár’s key remarks:

State in talks to buy stake in another large bank - The Hungarian state is in talks to buy a stake in another large foreign-owned bank, Lázár noted when asked about the restructurings in the local banking sector and the sale of MKB Bank and Budapest Bank.

It is unclear to us whether Lázár was referring to the pending deal between the EBRD, Erste Bank and the Hungarian state or the government plans to acquire ownership in another large foreign-owned bank which we do not yet know about. If it is the latter, let’s take a look who might be it: CIB (Intesa Sanpaolo), UniCredit, K&H (KBC Group) and Raiffeisen.

In the latter case, Hungary would violate the Memorandum of Understanding signed with Erste and EBRD. The MoU stipulates that "the Government of Hungary does not intend to take direct or indirect majority ownership stakes in systemically important local banks, except in case of a
threat to the stability of the overall banking system, and is committed to transferring all direct and indirect majority equity stakes it currently holds in local banks to the private sector within the next three years;"

In this respect Lázár reminded that the government wants to keep the share of Hungarian owners in the local banking system above 50%. As regards MKB, he said the bank was “practically bankrupt" and when the German owner sold it to the state with a resolution obligation the state was clear that it will be sold on the market after the resolution process is concluded. What is happening now is that the bank will be sold at the end of this process. As regards Budapest Bank, the minister reminded that the pledge was to eventually sell it and this has not changed.
As the share of domestically-owned banks is 55.5% and MKB’s contribution (based on total assets) is 5-6%, its sale might tip the balance if the bank were to be taken under foreign ownership. The central bank, however, made sure this would not happen and picked a group of buyers that is apparently 55% Hungarian-owned; and in practice MKB will certainly remain in local control.
Theoretically, the sale of MKB Bank does not jeopardise PM Orbán’s target of keeping at least 50% of the local banking sector in Hungarian hands.
PIT rate cut unlikely in 2017 - Asked whether the rate of the personal income tax will be lowered in 2017 or not, Lázár replied that the government and the Economy Ministry will discuss this possibility, but there is no final decision yet and the ministry does not support the idea.
New round in land auctions - There will be another round in the auction of state-owned land, the minister leading the Prime Minister’s Office said. So far they have sold 180 000 hectares for a total of HUF 240 billion. A decision on a new auction round is to be readied in the near future.
Asphalt case settled out of court - Following a meeting with European Commissioner for Regional Policy Corina Cretu in Brussels earlier this week, Lázár announced that instead of settling the so-called ‘asphalt case’ at the European Court of Justice Hungary is to resolve the long-standing dispute via negotiations. Budapest’s strategy has changed because “the Commission made a generous and favourable offer to Hungary" in terms of the financial correction. “These corrective measures will not result in net losses for Hungary," the minister added. He said that “a good deal is about to emerge" and the State Treasury could expect to receive HUF 500 bn worth of EU funds (Editor’s note: the EC will pay the part of the funds that are not withheld as corrective measure.)
Based on his negotiation with Cretu, Lázár stressed that the government wants to settle the issue of other pending payments shortly.

Last July, the European Commission officially suspended funding for Hungarian road construction projects, after examining the so-called asphalt case for 18 months. The EC found fault with a practice Hungary had been applying in road construction tenders since 2007. The Commission launched a probe into those contracts because only those construction companies were allowed to run in tenders for road construction projects co-funded by the EU that had asphalt mixing plants within a 50-kilometer radius of the given road stretch or in the county where the road was to be built. Barring other potential bidders from the tenders this way constitutes an infringement of EU competition regulations.

Amendment of the 2016 budget - The planned modification is necessitated by the fact that “revenues exceeded the target [and] the economy is doing better than what the government hoped for." The state structure will be manageable via decrees and resolutions; the budget will not need to be amended, he added.