Romania’s misguided bank tax risks derailing economic recovery

Over the past decade, bank taxes have been gradually spreading across emerging Europe. Hungary led the way in 2010, when Viktor Orban’s new Fidesz government implemented a swingeing levy on sector assets. Slovakia followed suit two years later and Poland in 2016.

Whether these levies were a reasonable response to industry misbehaviour or a justified means of raising revenue are questions that come more within the purview of politicians and economists than financial journalists.

But one thing is fairly clear. As bank taxes go, few if any have been as fundamentally inequitable and misconceived as that introduced in Romania on January 1.

The new levy is the brainchild of the Social Democratic Party (PSD), which has shown an increasing enthusiasm for flexing its populist muscles since scoring a decisive victory in parliamentary elections at the end of 2016.

Announcing the measure on December 18, as part of a broader tax-and-spend package that also included levies on energy and telecoms firms, finance minister Eugen Teodorovici dubbed it a “tax on greed”.

Not only is the bank tax unjust, it is also short-sighted to the point of stupidity

Romania’s banks, he said, were making excessive profits and colluding to keep interest rates artificially high. To counter this, they would not only be subject to a tax on assets, but the rate would rise in line with the local interbank offer rate.

Such bank-bashing rhetoric is nothing new for PSD. The party’s leaders have been inveighing against bankers with monotonous regularity over the past two years. As a justification for sector taxes, however, it is at best deeply disingenuous.

Interest rates have certainly risen in Romania over the past year – but this is largely due to PSD’s increasingly free-spending ways, which have fuelled a surge in inflation.

Indeed, so open-handed has the government been with public sector wage hikes, pension increases and energy subsidies that it is in danger of breaching the EU’s 3% budget deficit cap this year – something many see as the real motivation for the new sectoral taxes.

Profits… and losses

Then there is the question of bank profits. Teodorovici cited a European Banking Authority report showing that Romanian lenders had posted a return on equity of 21% in the first half of 2018. This, he noted, was three times the EU average.

This is so disingenuous as to amount to outright dishonesty. For one thing, the figure cited was for the country’s three largest banks. For the sector overall, the average was 15.7%.

More importantly, the period in question was one of extraordinary returns as Romania’s banks finally emerged from painful pre-crisis restructurings and were able to reduce provisioning levels. Between 2009 and 2014, the sector had struggled to break even, let alone turn a profit.

By 2015, returns on equity were back into double-digits but local bankers cite 12%-13% as a realistic long-term target.

To add insult to injury, some of the largest losses made by foreign-owned banks in Romania – a favourite whipping boy of PSD politicians – were due to mismanagement and lax corporate governance during the lenders’ time under state control.

Erste paid €3.75 billion for market leader BCR in 2005, then spent the best part of a decade dealing with the fallout from massive asset quality deterioration in its legacy corporate loan portfolio, much of it public sector-related.

Not only is the bank tax unjust, it is also short-sighted to the point of stupidity. Over the past few years, Romania’s combination of strong economic growth and low banking penetration has made it a focus market for regional banking groups in emerging Europe.

Whether they will be as happy allocating urgently needed capital to a country whose leaders apparently have no interest in supporting the banking sector, or indeed any understanding of the role it plays in economic development, is another matter.

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Investors take fright

Analysts at Unicredit say the impact of PSD’s fiscal package on lending and investment in Romania will likely be severe, bringing GDP growth down from an expected 4% last year to 2.1% by 2020.

They also note that, even with the new sectoral taxes, the country will likely breach the EU’s budget deficit cap this year due to higher spending, poor collection and more expensive borrowing as banks curb bond purchases.

Investors have already taken fright. Romania’s stock market, which was on course to be one of the best performers in the region last year, fell more than 17% in the three days after Teodorovici’s announcement.

Over the same period, the shares of new market leader and national champion Banca Transilvania lost nearly a quarter of their value.

Regional groups with high exposure to Romania were also hard hit, even in the context of weak European equity markets. Erste’s share price was down by 13.6% at one point, while Raiffeisen’s stock fell by 10.6%.

Some of those losses were clawed back in the last days of December as the measures were slightly watered down, but Romania’s blue chip BET Index still ended 2018 in negative territory. Before the announcement of sectoral taxes, it had been 8% up on the year.

PSD’s leaders may be successful in persuading Romanian voters that the country’s banks are greedy and deserve to be punished. On any independent analysis, however, it is fairly evident that the greed here is all on the side of the government, which wants to have its populist cake, eat it and make the banks pay for it – whatever the cost to the economy.