What to make of the 7 per cent levy which Hungary is imposing on bank holdings of local government debt?
This is debt that is being assumed by the central government. So, it was curious to see the government insist on Tuesday that its $219m tax collection isn’t a hidden write-down. (We should in any case preface this post by noting that Hungarian bonds have been bullet-proof lately.)
More from Nomura’s Peter Attard Montalto:
The Ministry is of course right that what has been proposed is not a technical selective default under the rules of either the debt contracts themselves or indeed under the rating agencies rules (though it is pushing the latter right to the limit). However in spirit this is most definitely a selective default to me, requiring under force of law for the net discounted present value of a credit instrument to be reduced by the legal entity which has repayment obligation on the debt.
We should watch however for the agencies reaction as this is still pretty unprecedented and whilst in the current benign local environment there is ratings stability – the ratings are of course still on negative watch from both Moody’s and S&P and they could well cite worries about precedent in terms of keeping a negative outlook even if they don’t treat it as a selective default.
Governments can levy taxes on holdings of debt at any time of course, and to some extent ‘financial repression’ is a misnomer here (and perhaps, anywhere else).
But as Nomura point out, the tax has popped up really quite suspiciously soon after Hungary considered negotiating an old-fashioned, 15 per cent haircut on the debt principal. (But the government stepped away from this kind of move because “in the modern financial world everybody knows that if the debtor doesn’t pay it’s considered a default.” Raiffeisen recently declared that “banks will not incur losses as a result of the takeover” of the muni debt.
The 7 per cent tax is smaller but it’s also upfront (and payment, due in December, will help the budget this year). It feels like something of a grey area…
Hungary: a little extra tax for the kitty – beyondbrics