Bloomberg News

Forint Weakens for Second Day as Hungary Clashes With EU on Tax

September 29, 2011

Sept. 29 (Bloomberg) -- The forint weakened for a second day as Hungary’s refusal to end a telecommunications tax deepened concern the government will struggle to reduce its budget deficit.

Hungary’s currency depreciated 0.5 percent to 291.72 per euro as of 3:14 p.m. in Budapest. The currency has retreated 8.8 percent this quarter, heading for its worst performance since the three-month period ended in March 2009.

The European Commission called on Hungary today to abolish a tax on telecommunication operators, saying the revenue is used for the government’s central budget and not for meeting the specific costs of regulating the industry. Prime Minister Viktor Orban’s government sees “no reason” to end the special levy designed to narrow the budget shortfall, Peter Szijjarto, the prime minister’s spokesman, said in a statement today.

The dispute over the tax signals Hungary’s policies are “not sustainable,” Daniel Lenz, chief emerging markets strategist at DZ Bank AG in Frankfurt, wrote in an e-mailed response to questions from Bloomberg. “Moreover, today’s decision from Brussels has proven that some political decisions are perhaps doubtful from a legal perspective too.”

Orban imposed special taxes on energy, financial, retail and telecommunications companies last year, as part of measures to cut the deficit to 2.5 percent of gross domestic product next year following a shortfall of 4.3 percent in 2010. He plans to lower Hungary’s debt to 72 percent of gross domestic product next year from 80 percent at the end of 2010, which was the highest among the European Union’s eastern members.

‘Dangerous Precedent’

A separate law allowing the early repayment of foreign- currency home loans at below-market rates with banks absorbing the costs, which enters into force this week, sets a “dangerous precedent,” may reduce the willingness of parent companies to fund their Hungarian units, hurting credit and economic growth, Fitch Ratings said in a statement yesterday, echoing similar comments from Moody’s Investors Service a day earlier.

The mortgage repayment “plan is a disaster and the timing to introduce it could not have been worse,” DZ Bank’s Lenz said. “As foreign banks are strongly affected as well I expect this to become an issue that will be discussed on a European political level.”

Hungary today cut its offer of 12-month Treasury bills by 34 percent at an auction after getting the lowest amount of bids on that maturity in more than six years. The government raised 26.4 billion forint ($124 million) of bills, 13.6 billion forint less than planned. Investors bid for 30.2 billion forint, the least since Feb. 10, 2005, according to data from the Debt Management Agency compiled by Bloomberg.

--Editors: Stephen Kirkland, Linda Shen

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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