UPDATE 1-Hungary bank association head quits in bank tax row

Tue Nov 13, 2012 5:34am EST

* Government delayed plan to halve bank tax next year

* To double new tax on financial transactions

* Announcement could hit chance of foreign loan deal

BUDAPEST, Nov 13 (Reuters) - The head of Hungary's Bankers' Association resigned over new taxes imposed on the financial sector, throwing a spotlight on a dispute with the government that could hit the country's hopes of securing foreign aid.

Mihaly Patai's departure, announced by the association on Tuesday, is the latest chapter in the long-running conflict between banks and Prime Minister Viktor Orban, who has used unorthodox tax measures to stabilise the budget in central Europe's most indebted nation.

Orban's government last month reneged on a pledge to halve Europe's highest levy on the banking sector next year and then doubled a new tax on financial transactions as Hungary struggles to keep its deficit within European Union limits.

Patai, who also leads UniCredit's Hungarian business, announced he was quitting a day after parliament approved the proposed tax changes, some of which the European Commission criticised as "distortionary" and harming growth.

"As approval of the government proposals took place last night, the chairman has officially notified (the body) of his resignation," the association said in a statement.

Orban's proposals, unveiled last month, prompted banks to issue a statement expressing "shock" over what they called the government's unilateral breach of an earlier agreement.

Some of the measures, which also include new taxes on public utilities, went against International Monetary Fund advice, dimming prospects for an agreement on an international financial safety net for Hungary after a year of on-off negotiations.

The banks said the measures could undermine funding of the economy, which is mired in its second recession in four years.

That echoed an assessment by the National Bank of Hungary.

The association's deputy chairman Daniel Gyuris would serve as interim head until a permanent replacement for Patai is found, the group said.