Good news from the ECB: no MNB recapitalisation is needed in 2024

HUNGARY - In Brief 04 Sep 2023 by Istvan Racz

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Finance Minister Varga announced this morning that the ECB endorsed the government's intention not to carry out any recapitalisation of the MNB in 2024, despite the expected occurrence of about HUF2000bn negative capital in the Bank's balance sheet at end-2023. According to the announcement, the ECB agreed that the central bank's temporarily existing negative capital stock should not limit its ability to appropriately conduct monetary policy, and that this hole on the balance sheet will need to be eliminated from the MNB's likely profits in subsequent years. This means that the government will not have to spend HUF400bn on raising MNB's capital in 2024, as the current central bank act would require. The act will be most likely amended swiftly after the ECB's endorsement. The above-mentioned amount was not secured by the approved 2024 budget, and so it would have had to be amended, had the ECB not accepted the government's view on the subject. The risk in this regard was that the ECB may not endorse the idea, given that the MNB is a regular borrower of the ECB in the form of repo credit, and the basic rule is that borrowers are required to be solvent.  Until December 2022, the central bank act required the government to eliminate any negative capital occurring at the MNB at a year end immediately. Then it was amended - also with ECB endorsement - in a way that the requirement to replenish capital was stretched out to five years for any observed negative capital stock. So even if the ECB had refused the government's proposal now, the MNB's capital stock would have remained still substantially negative most probably for several years.