Hungary Considers Controversial Change in Loan Repayment Calculation

Hungary Considers Controversial Change in Loan Repayment Calculation

Hungary is facing a crucial decision regarding a potential technical change in the calculation of loan repayment rates. This change aims to reduce borrowing costs and stimulate economic growth. However, it has faced criticism from the Bank of Hungary, raising concerns about its effectiveness and impact on policy maneuverability.

Finance Minister Mihaly Varga revealed in an interview that the government will soon decide whether to replace interbank rates with Treasury bill yields as the new benchmark for corporate and retail loans. This shift to a much lower benchmark is part of Prime Minister Viktor Orban’s efforts to revive Hungary’s economy.

The central bank has expressed concerns about the proposed change, deeming it “misguided.” According to the bank, substituting interbank rates with Treasury bill yields would limit the scope for policy maneuvers. It argues that alternative measures should be considered to ensure stability and effectiveness in addressing economic challenges.

Finance Minister Varga defends the government’s proposal, stating that it is a legitimate measure aimed at benefiting both financial institutions and the government. He acknowledges the market’s confusion surrounding the initiative but believes that clarity will emerge in due course. However, critics argue that this move represents another example of Budapest’s unconventional policies, posing a risk to the financial sector.

Hungary’s economy has been marred by a surge in inflation, reaching 25% – the highest in the European Union – leading to a recession. Although growth is projected to resume in 2024, a recent Reuters poll suggests that it will fall short of the government’s forecasted 3.6% growth rate. The proposed change in loan repayment calculation is expected to address these economic challenges and facilitate a much-needed recovery.

Lukas Freund, an analyst at S&P Global Financial Institutions, highlights the unconventional nature of Budapest’s policies. While they aim to boost economic growth, they also carry significant risks for the financial sector. The proposed change in loan repayment calculation is considered a prime example, as critics fear it could further destabilize an already fragile system.

In response to the central bank’s criticism, the government has accused them of mishandling the root cause of the problem. The widening gap between the Budapest Interbank Offered Rate (BUBOR) and Treasury bill yields, which prompted the proposed change, has been a point of contention. The government’s position is that the central bank failed to address this issue adequately, leading to the need for a policy intervention.

Hungary is grappling with a critical decision regarding a potential change in loan repayment calculation. While the government believes it is a necessary step to bolster the economy, the Bank of Hungary has expressed its concerns. The proposal has garnered both support and criticism, highlighting the ongoing debate about the proper course of action. As Hungary aims to navigate its economic challenges, the decision made in the coming days will undoubtedly have significant implications for the country’s financial sector and economic recovery.

Economy

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