SZABÓ KELEMEN & PARTNERS ATTORNEYS

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1 dr. Tamás Kárpáthegyi Geoff Bennett Crisis-management measures in Hungary (version 6) 1 8 April, 2009 Bank Bailout Package: Deposit Guarantee: Interest Rate: Bank Bailout Package: OTHER IMF/World Bank/ECB Loan: On December 15, 2008, the Hungarian Parliament approved a 600 billion forint ( 2 billion) bank bailout package, which was promulgated on December 22, 2008, as Act CIV of 2008 on the strengthening of the stability of financial intermediaries. The bailout package enables the Government (i) to provide debt guarantees to Hungarian banks up to the aggregate amount of HUF 1,500 billion ( 5 billion); and (ii) to recapitalize troubled banks with or without their consent up to a total of HUF 600 billion ( 2 billion). The bailout package is financed from the IMF loan drawn, or to be drawn, between 2008 and Debt Guarantee Scheme: The debt guarantee scheme is available to banks licensed in Hungary which meet prudent capital requirements. It is available to guarantee obligations arising from loans or debt securities which are denominated in euros, Swiss francs, or forints, and only if repayment is to be made by the bank in the currency in which the obligation is denominated. On October 15, 2008, a legislative change was enacted to increase the limit of insured deposits by the National Deposit Insurance Fund (OBA) from 6 to 13 million forints ( 45,000) per financial institution, and the 10% own-risk component was removed (statutory guarantee). The funds constituting the OBA are collected from the banks. In addition, on October 15, 2008, an unlimited governmental guarantee was declared in respect of bank deposits in excess of what is insured by the OBA (governmental guarantee). On October 22, 2008, the Central Bank of Hungary increased its base rate from 8.5% to 11.5% to defend the Hungarian forint against speculation. The Central Bank subsequently cut its growth and inflation forecasts for 2009 and 2010, and on November 24, 2008, it decreased its base rate from 11.5% to 11.0%. On December 8, 2008, the Central Bank further decreased its base rate from 11.0% to 10.5%, on December 23, 2008, to 10.0%, and on January 19, 2008, to 9.5%. The base rate has remained unchanged since then as the value of the forint has been volatile. Central Bank Measures: HUF liquidity measures: The Central Bank has introduced the following HUF liquidity measures: (i) public debt securities auctions: the Central Bank agreed with primary dealers that market makers will provide continuous quotes for certain public debt securities and increase their holdings of public On December 15, 2008, the Hungarian Parliament approved a 600 billion forint ( 2.2 billion) bank bailout package, which was promulgated on December 22, 2008, as Act CIV of 2008 on the strengthening of the stability of financial intermediaries. The bailout package enables the Government (i) to provide debt guarantees to Hungarian banks up to the aggregate amount of HUF 1,500 billion ( 5.4 billion), and (ii) to recapitalize troubled banks with or without their consent up to a total of HUF 600 billion ( 2 billion). The bailout package is financed from the IMF loan drawn, or to be drawn, between 2008 and Recapitalization Scheme: Upon the request of an eligible bank, the Government may acquire non-voting dividend preference shares or voting preference shares entitling it to veto, among other things, matters relating to dividend distribution. In this voluntary recapitalization scheme the bank and the Government must enter into an agreement setting out the value of the shares and Hungary has obtained financial support from the IMF, the EU and the World Bank in the amount of 20 billion after Hungarian assets were battered as foreign-currency borrowing by local companies and consumers, along with slower growth, a wider budget deficit and higher government debt than elsewhere in east Europe, raised concern that the country may have difficulties in securing funding. The IMF will provide a 17-month, SDR 10.5 billion ( 12.3 billion) Stand-By Arrangement under its exceptional access policy, the EU will provide 6.5 billion to facilitate fiscal consolidation, and the World Bank will provide 1 billion. Hungary has also secured a 5 billion loan from the ECB. EIB Loan: In addition, on the basis of a facility signed on January 26, 2009, the European Investment Bank (EIB) is lending 440 million to part finance 1 Prepared in conjunction with Shearman & Sterling LLP

2 Banks that wish to have recourse to the scheme must issue preference shares entitling the Government to veto decisions on dividend distribution, and must undertake limitations on management compensation. debt securities by an agreed amount, and the Central Bank will conduct auctions for the purchase of these securities; (ii) variable interest rate loan tenders: the Central Bank is assisting primary dealers and banks in financing purchases of public debt securities by introducing a six-month loan tender at variable interest rates; (iii) two-week loan tenders at fixed interest rates; (iv) Central Bank deposit rate cut: the Central Bank has decreased the interest rate on overnight Central Bank loans and deposits to + / - 50 basis points around the relevant asset s interest rate; (v) the Central Bank has widened the scope of acceptable collateral for Central Bank financing (municipal bonds and certain mortgage securities have become acceptable security), and reduced the minimum rating criteria from A to BBB; (vi) easing of reserve requirements of banks relating to certain types of liabilities from 5% to 2%. FX liquidity measures: The Central Bank has introduced the following FX liquidity measures: the rights and obligations of the Government in respect of the bank s operation. The bank will have a call option to acquire the shares from the Government, and the Government will have a put option to sell the shares to the bank. In case of a forced recapitalization, the Government may acquire the right to exercise all shareholders rights in respect of the general meeting of the bank, including decisions on recapitalization, if (i) the bank needs access to the special liquidity loan of the Central Bank of Hungary for more than 20 days in excess of a specific amount, (ii) if the bank fails to satisfy prudent capital requirements, (iii) if the Government is forced to make a payment to the bank s creditors under the debt guarantee scheme, or (iv) if the insolvency of the bank would seriously harm the system of financial intermediaries in Hungary. The Government must declare the satisfaction of these circumstances in a government decree. Existing shareholders of the bank will have a right to sell their shares to the Government within 120 days after the entry into effect of the government decree, at a price to be determined on the basis of the shareholder s stake in the bank and the value of the bank s equity as per the interim balance OTHER Hungary's national contribution to the implementation of priority projects in the areas of research and innovation identified under the Hungarian National Strategic Reference Framework for the period EBRD, EIB, World Bank Assistance: On February 27, 2009, the EBRD announced that together with the EIB and the World Bank they have pledged to provide up to 24.5 billion to support the banking sectors in the region and to fund lending to businesses hit by the crisis. The initiative will include equity and debt financing, credit lines, and political risk insurance. No concrete measures have been implemented so far in respect of Hungary under the plan. Fiscal Measures: Measures have been taken to ensure a more prudent fiscal policy. The Government has submitted to parliament a revised 2009 budget aiming at a 2009 deficit of 2.6% of GDP, and on November 17, 2008, legislation was passed to limit government spending in 2009 to 2008 levels, and permitting an increase in spending in 2010 to 50% of GDP growth. To help achieve deficit targets 2

3 (i) two-way overnight FX swap tenders with the Central Bank playing the role of intermediary by matching excess forint and euro funds offered by the banks; (ii) an overnight FX swap facility for domestic banks, facilitated by an agreement between the Central Bank and the ECB; (iii) EUR/CHF swaps on the basis of a cooperation agreement between the Central Bank and the Swiss National Bank, signed on January 28, 2009 (local banks need CHF to finance their large CHF loan portfolios); (iv) six-month EUR/HUF FX swap: a euro liquidity FX swap tender funded with 5 billion has been introduced for banks which undertake to keep their lending to corporates in 2009 at 2008 year-end levels and which agree not to withdraw funds from Hungary; (v) three-month EUR/HUF FX swap: commencing from March 9, 2009, the Central Bank introduced a euro liquidity FX swap tender funded with 2.2 billion, the unused amount remaining from the 5 billion allocated for the six-month EUR/HUF FX swap. Verbal intervention: On February 23, 2009, the Central Bank, simultaneously with the sheet of the bank to be prepared as of the date preceding the entry into effect of the government decree. FHB: On March 31, 2009, as part of the voluntary recapitalization scheme, the Government and Land Credit and Mortgage Bank Ltd. (FHB), a large mortgage lender, signed an agreement according to which the Government will provide FHB with a capital injection worth 30 billion forints ( 100 million) in exchange for non-voting dividend preference shares and a special veto share. FHB agreed to maintain its mortgage lending portfolio at previous levels. In addition to the capital injection under the bailout legislation, on March 25, 2009, the Government and FHB agreed that FHB will be granted a 120 billion forint ( 410 million) credit line to boost lending to private individuals and SMEs. Both measures are financed from the 20 billion IMF/World Bank/ECB loan. OTP: Besides FHB, according to a loan agreement signed on March 25, 2009, OTP, Hungary s largest bank, will also receive a Government loan worth 400 billion forints ( 1.35 billion). The loan is not part of the bailout scheme, although OTP agreed to appoint a person designated by the Government in its supervisory board. OTP OTHER and stimulate growth, the Government has proposed new tax legislation which would become effective from the middle of Most notably, the package includes an increase of VAT from 20% to 23% to increase Government revenues and a decrease of taxes levied on employee compensation by approx. 6% to stimulate growth and facilitate job retention. Pension payments to the elderly would decrease (discontinuation of 13 th month s pension), and the terms of eligibility to several social payments would be revised. Stimulus Measures: The Government has announced a 1,400 billion forint ( 4.6 billion) two-year economic stimulus package to promote growth and provide funding for small- and mediumsized businesses, as well as a HUF 1,800 billion ( 6 billion) investment stimulus package aimed primarily at the support of the construction industry. HUF 1,400 billion ( 4.6 billion) economic stimulus package: The HUF 1,400 billion stimulus package will not involve new spending, instead it will regroup existing funds in the budget. The biggest part of the package, 680 billion forints ( 2.2 billion), will be spent on 3

4 Czech, Polish and Romanian central banks, announced that they will undertake whatever measures are required to prevent fluctuations in the value of their national currencies if fluctuations could lead to market disturbances. All four currencies strengthened somewhat after the announcements, but more importantly the step indicates that the central banks have recognized the need for coordinated action in the region to protect national currencies outside the eurozone. agreed to supplement the loan with 200 billion forints ( 0.7 billion) of its own funds to provide financing to SMEs. The loan is financed, similarly to the FHB loan, from the 20 billion IMF/World Bank/ECB credit line. OTHER providing lending guarantees primarily to SMEs, while another 260 billion forints ( 0.9 billion) will be used to provide liquidity for lending through commercial banks. The Government also plans to provide 300 billion forints ( 1 billion) in interest rate subsidies for corporate lending, and another 140 billion forints ( 0.5 billion) for direct loans to micro firms and SMEs. Concrete measures that have so far been introduced as part of the 1,400 billion forint stimulus package include: (i) an increase of 450 billion forints in the amount of government guarantees offered by Garantiqa Hitelgarancia Zrt., a company jointly owned by the Government, commercial banks and business associations, to SMEs to facilitate their borrowing; (ii) 50 billion forints from the funds of the EU and the Hungarian Development Bank will be made available to SMEs through commercial banks to facilitate the access of SMEs to these funds, and 140 billion forints will be made available in a similar fashion for the purpose of the current asset financing of SMEs. In addition, in the case of EU tenders, the amount of 4

5 OTHER automatic advance payments will be increased up to 40% of the total amount of the support, which will be transferred to applicants within 15 days after the signature of the financing contract. HUF 100 billion ( 330 million) is expected to be made available to applicants by March HUF 1,800 billion ( 6 billion) investment stimulus package: The HUF 1,800 billion investment stimulus package is aimed at providing the construction industry with orders in the coming 18 months. The money is being made available from EU development funds. The package contains 636 investments (schools, medical facilities, railroads, public roads, etc.) planned for completion, which are identified in a database run by the National Development Agency. Workplace Retention Measures: The Social and Labour Ministry has introduced several measures to facilitate workplace retention programs at troubled employers. These measures consist primarily of making funds available in the aggregate amount of HUF billion ( 358 million) to employers which announced mass redundancies or which 5

6 OTHER otherwise are struggling to keep their employees. The funds can be used generally to supplement employee compensation where reduced working hours would bring about pay reductions, to support part-time working arrangements and training, and to support the relocation of terminated employees. The availability of a portion of the funds (HUF 20 billion or 65 million) is still pending Government approval. Regulatory Measures: PSZAF circular: On February 25, 2009, PSZAF, the Hungarian financial regulator, issued a circular to banks in which it briefly set out its recommendations for handling the crisis. Among other things, PSZAF advised banks that they should not declare dividends, and that they should refrain from using innovative financial products such as structured securities, structured FX linked swaps, and speculative FX options. In addition, PSZAF warned that applications for exemptions from certain discretionary capital adequacy requirements would be turned down. Regulatory commissioner: According to legislation promulgated on April 3, 2009, PSZAF will be authorized to 6

7 OTHER appoint a regulatory commissioner to oversee the operation of banks whose capital adequacy ratio does not comply with applicable requirements and whose foreign parent institutions fail to provide the necessary funding to the Hungarian subsidiary. Debt Guarantee to Private Borrowers: According to legislation promulgated on March 10, 2009, the Government will provide debt guarantees for private individual borrowers who are forced to take out a bridging loan from their bank to enable them to satisfy debt servicing requirements under their home loan mortgages. The bridging loans will have a grace period of 24 months. The debt guarantee will be available to any person who had taken a mortgage loan in the past but lost his job after September 10, 2008, for a reason beyond his control, is searching for a new job, lives with his family in the house which was mortgaged, and owns no second home. New Government: On March 23, 2009, Ferenc Gyurcsany, the prime minister of Hungary, resigned. Hungary s ruling party and their former coalition partner have 7

8 OTHER agreed on a candidate to lead a new government: the economy minister, Gordon Bajnai. If approved by Parliament, the new government can be formed in April. 8