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Matolcsy’s Program Evokes Mixed Feelings.

Published: April 6, 2013; 14:42 · (Vindobona)

During a press conference on Thursday, April 4, new Govenor of Hungarian National Bank (MNB), György Matolcsy presented some of the “creative financial market instruments”.

Matolcsy’s Program Evokes Mixed Feelings. / Picture: © Wikipedia / kormany.hu

The program should be used to improve economic growth in Hungary. Free credits and other “incentives” are supposed to lure commercial banks out of their unwillingness to grant loans. Furthermore, the foreign exchange reserves will be used for the repayment of debts. The reactions are mixed. Some experts fear that these measures involve a greater risk than the desired benefit. Matolcsy regards these arrangements as justified as the inflation has decreased to less than 3 % at the beginning of the year (compared with more than 5 % in the previous year) and seems to be under control again. Around € 830m, which equals 0.8 % of GDP and 3.5 % of the total of the corporate loan portfolio, will be provided without interest rates for commercial banks which can pass them on to enterprises as credits with interest rates up to 2 %.

Another big share will be used for the rescheduling of SME credits whereas a similar strategy compared with the aid program for private households is planned. Forex loans should be changed to prolonged forint loans at an advantageous interest rate. Matolcsy hopes for 30 % of SME forex loans to convert to forint loans in this way. New loans will be kept in the books of MNB. The credit risk should therefore be shared with the commercial banks. Furthermore, aid money in the amount of approx. € 3bn, which is 10 % of the country’s foreign currency reserves, should help decrease the share of short-term insets of commercial banks with MNB from the current € 15bn to € 12bn. However, the problem is that most of these two-weeks-bonds are considered as progressive and unfailing investment opportunities in contrast to investmens in the open market and credit business in the interbank system, which has been avoided since the financial crisis.

The reduction of this possibility, which additionally saves the state taxes, could be attractive to other affiliates of foreign banks to withdraw money from Hungary. This would have a complete opposite effect Matolcsy would intend, namely to put the money in form of loans into circulation. Furthermore, the budget deficit would decrease from around € 70.3 to approx. € 67bn, yet only with the support of the central bank reserves. Thus, the quota the government was so proud of will be reached before the sharp drop in the forint made the reduction in deficit dearly paid for futile. Apparently it was primarily only to impress Brussels with a lower budget deficit.

Both programs will start in June and are – for the time being – limited to a three months trial period. Market experts render the steps as moderate but not entirly free from risk. The increase of circulating capital is always connected with the risk of inflation. Furthermore, the use of foreign currency reserves could be regarded as a fatal signal to further speculate on the Hungarian forint without risking a minimizing of bad debts.