Romania’s ‘Greed Tax’ Reminds Banks of Eastern Europe’s Risks

(Bloomberg) -- Romania’s move to shore up the budget with a new tax should stand as a reminder to foreign-owned banks in eastern Europe how vulnerable they can be in the region.

Faced with a shortfall of around 30 billion lei ($7.3 billion), the Bucharest-based government turned to targets with little clout and deep pockets, and it didn’t have to look very far. All but one of the biggest banks in the Balkan nation have Austrian, French, Italian or Hungarian parents, and after a few bad years following the financial crisis, they again enjoy better margins and higher growth than at home.

“With banking systems largely foreign owned, a bank tax is a politically convenient way to shift the burden of fiscal tightening from domestic to foreign actors,” Morgan Stanley analyst Pasquale Diana said in a note. “Regular readers of central and eastern European macro research will recognize this pattern.”

Hungary, Slovakia and Poland are among other post-communist countries where foreign banks that have an outsized market position are slapped with taxes and -- in Hungary’s case -- forced to bear the cost of cleaning up the mess from ballooning Swiss franc-denominated mortgages. The fact that they had first pushed those products upon customers helped the popularity of Hungarian Prime Minister Viktor Orban’s war on banks.

System Shock

The latest shock to Romania’s financial system came on Tuesday when Romania said it wants to introduce a tax on the financial assets of banks to raise an additional 3.6 billion lei in revenue next year, helping narrow the budget deficit to the 3 percent of gross domestic product limit allowed by the European Union.

Finance Minister Eugen Teodorovici said the government wants to pass the progressive tax on banks’ assets tied to money-market rates via an emergency decree by the end of the year.

“We call it ‘the tax on greed’ and its impact next year will probably be around 3 billion lei,” Teodorovici said.

Past moves by regional governments highlight how one country’s actions can have a ripple effect in the larger lending industry.

Hungarian Pain

Austria’s Erste Group Bank AG and Raiffeisen Bank International AG, which are among the most affected from the Romanian measures, already suffered huge losses on Hungary’s banking measures. Erste took another hit when it cleaned out Romanian bad debt in 2014. Erste once bought its Romanian bank BCR for six times its book value, or 3.75 billion euros ($4.28 billion), in 2006, its biggest-ever acquisition.

Erste, which may have to cut its outlook on the measures, slumped as much as 10 percent on Wednesday, the biggest decline in more than two years that erased 21 months of share gains. Raiffeisen fell to the lowest level since July 2017. Pure Romanian banks were even harder hit, with Societe Generale SA’s BRD falling as much as 16 percent and Banca Transilvania -- the only large Romanian-owned lender -- by as much as 21 percent.

“New business plans will be pared back in Romania now, we expect,” said Jonathan Tyce, a banking analyst at Bloomberg Intelligence. “Share price reactions aren’t that out of kilter when you factor in the hit to revenue and earnings that the asset levy will bring.”

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