New legislation presents challenges to investors as the Hungarian government advances its ‘unorthodox’ political agenda
Hungary has been in the news recently because of floods and stories about politics and new legislation. Since its election in 2010, the government has used its parliamentary majority to pass much legislation — 223 new laws in 2012 — including a new constitution, labour code, civil code, tax legislation and much else. The legislative process has in many cases become routine: new legislation is announced, put before Parliament, approved and introduced within a matter of days.
From an investor’s perspective, some of the laws of general application (such as the new labour code and civil code) can be seen as positive and constructive developments. However, other changes have introduced uncertainty, such as restrictions on the use of international arbitration on contracts with the state, municipalities and most entities they own. This change will not assist with large infrastructure projects, for example, or capital markets transactions, in which the use of foreign laws and jurisdictions are common practice.
The Hungarian government has not been alone in blaming the financial crisis on the financial sector. Foreign currency borrowing is seen as a major contributor to the country’s economic difficulties at a corporate, municipal and individual level. As such, the government has introduced a ‘crisis tax’ on the banks and required lenders to give borrowers the opportunity to convert their foreign currency mortgages into local currency at historic exchange rates. The immediate effect was a 20–30 per cent ‘haircut’ for banks…
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