Economy 29 June 2023, 2:55pm

Hungary gov't has an idea how to handle central bank's gigantic loss

Portfolio

The debate on the 2024 budget has entered its final week. The Economic Cabinet discussed related issues, including the proposal for the loss relief of the National Bank of Hungary (MNB), Mihály Varga wrote on his Facebook page. The finance minister's post does not say what solution is being considered, but it is likely that the negative equity existing in several European countries could be the way out of this particular predicament.

Next week, the National Assembly will hold the final vote on the 2024 budget bill, and in the heat of the moment, the Economic Cabinet has discussed important issues. According to Mihály Varga's post, one such issue is the compensation of the MNB's loss, but it is not clear what proposal has been put on the cabinet's table.

We have previously written several articles about the MNB's loss relief, and the Fiscal Council has also criticised the fact that next year's budget does not include an item of up to HUF 300-400 billion. Under the current rules, if the central bank's equity falls below its subscribed capital, the state budget has to pay the difference in equal instalments over five years, which is the time allowed for recapitalisation. In this context, an amendment to the Central Bank Act was adopted earlier this year, introducing this five-year grace period.

However, it seems that even spread over five years, the MNB's losses could be too large a burden, as it is estimated that its equity could fall by up to HUF 2 trillion this year, which would put a burden of around HUF 400 billion on the 2024 budget.

This has not been taken into account in the budget bill so far, and Gergely Gulyás, the Prime Minister's chief of staff, told a press conference that they are waiting for guidance from the central bank on the amount of this loss, and also waiting for proposals from the Fiscal Council and the central bank on how to ensure that

this is not such a big burden on the budget, but a smaller one, or not a burden at all.

A day later, MNB Deputy Governor Barnabás Virág pitched in by saying that international practice suggests that many of the world's central banks face similar problems, and there are several central banks that can operate credibly with negative equity during a transitional period. Dialogue with the government must continue to meet this challenge, said Virág.

In other words, the problem could be solved by letting the MNB operate permanently with a negative equity, so that the budget does not have to make up for the loss. There are several examples of this in Europe, but we understand that in all cases it requires the approval of the European Central Bank (ECB), which may still be awaited by the domestic authorities.

Cover photo: Portfolio