The Hungarian government expects demand for government bonds to rise by HUF1.8 trillion (€4.8bn) from regulatory changes that it introduced on May 31 that penalise other investments and promote state issues.
The government slapped a "social contribution tax" of 13% on savings and set minimum levels for investment funds' holdings of government bonds. Banks can also cut 2024 payments of windfall tax by up to half if they increase purchases of local government bonds.
In a decree, the government levied a tax of 13% on returns from investment funds – except real estate funds – bank deposits and some other investments. The extra levy is in addition to the 15% interest gain tax.
Households can buy government bonds without any fees, and gains are exempt from the interest tax. Banks must also inform clients once a year about potential gains made if they choose government bonds over deposits.
Economic Development Minister Marton Nagy said that the stock of government bonds holdings held by banks could rise by HUF1.3 trillion and additional demand from investment funds could reach HUF500bn.
Under the decree, the government will impose a de facto mandatory allocation in Hungarian government bonds for bond funds, equity funds and mixed funds. A decree issued in April set the weight of securities in their portfolio at 60%. In the latest regulation, the government stipulated that these funds must hold at least 20% of their liquid assets in discount treasury bills from August 1.
Of the HUF11 trillion of money held in Hungarian investment funds, HUF3.2 trillion is held in cash and deposits, HUF3 trillion in investment units, HUF2.7 trillion in bonds and HUF2 trillion in shares.
According to the financial website Portfolio.hu, the amount held by domestic investment funds in bonds other than Hungarian government bonds is more than HUF1.5 trillion.
From a liquidity point of view, the expected change in the structure of savings will be irrelevant for banks, but 5-10% of banks' retail funding could move, which banks could only stop at the cost of a large loss of profits. "As their loan-to-deposit ratios are sufficiently low, they will typically not try to do either," Economic Development Minister Marton Nagy told reporters at a background meeting.
He also said that the main goal of the measure to impose a 13% tax on savings is to channel funding to government bonds, and said the budgetary impacts are secondary.
Hundreds of billions from retail investors could also flow to government securities from the HUF8 trillion held in bank deposits, according to analysts, Nagy said.
Local banks flooded with liquidity pay less than 1% interest on sight deposits and less than 5% on around HUF1 trillion forints worth of term deposits, Nagy added.
The Hungarian Banking Association said the move will be negative for the banking sector and it condemned the government for breaching its promise to phase out windfall taxes for the financial sector. The extension of the extra profit tax in 2024 will reduce financial institutions' revenues and lending and weaken the resilience of the economy, it said.