* One-off conversion would hit forint, economy -Kiraly
* Size of bank tax amounts to "punishment" of sector
* Ban on repossessions can kill mortgage note market
(Adds more comments detail)
By Gergely Szakacs
BUDAPEST, Oct 6 (Reuters) - Hungary's central bank made a scathing critique of government economic thinking on Wednesday, calling a windfall bank tax punitive and warning of dire consequences if all forex loans to households were converted to forints.
The centre-right government, which took office in May and extended its grip on power at municipal elections on Sunday, wants to collect 200 billion forints ($1.03 billion) this year and next in a bank tax to plug holes in the budget.
"This is not about taking from the rich and giving to the poor," central bank Deputy Governor Julia Kiraly told a business conference.
"This is about taking (money) from where there is money, at 0.4 percent of GDP (amount of tax as proportion of Hungarian economy). Of course there is a bank tax elsewhere, at 0.04 percent, so in those countries it is not a punishment."
Kiraly also said converting the stock of foreign currency loans held by Hungarian households into forints in one step would spell disaster for Hungary.
"We will have to learn to live together with this problem. We cannot get rid of it like a hot potato in the next 5-15 years," Kiraly said, referring to how long it will take for existing foreign currency mortgages to clear out of the system.
"(Household foreign currency loans) cannot be converted in a single step as this would cause a 20 percent exchange rate depreciation and a 6 percentage point fall in GDP."
Conversion of some troubled loans is among measures being considered by the government under a scheme to ease problems with foreign currency loans.
At the end of June, the stock of foreign currency loans held by households, mainly in the volatile Swiss franc, amounted to a staggering 7.253 trillion forints -- a key source of financial stability risk for Hungary if the forint weakens.
Kiraly said the government should focus its efforts instead on drawing up a sustainable economic policy, which can reduce exchange rate volatility and risk premia.
The economy ministry has to submit the draft 2011 budget to the government by Oct. 15, but hardly any details have emerged so far on what measures it will contain to bring Hungary's budget deficit below the EU's 3 percent of GDP ceiling.
INTOLERANT INTERVENTIONS
Kiraly also said the government's ban on house repossessions can fatally undermine the mortgage note market in Hungary, and domestic banks OTP and FHBmay not be able to sell their mortgage notes if the collateral behind them cannot be enforced.
"Some type of social safety net is needed. The state must weave a social safety net but it should not decide irresponsibly about taxpayers' money and it should not kill off with an repossession ban an already ailing mortgage note market," she said.
Kiraly said the government should stimulate the mortgage market, put into practice an existing law on responsible lending practices, launch a registry of reliable borrowers and control the clout of banks by creating a transparent pricing environment.
Kiraly added that a ban on foreign currency lending to households imposed by the government earlier this year was inappropriate in the age of free movement of capital.
"Instead of intolerant interventions we should understand this machine, which, if it runs smoothly, can help us," Kiraly said. "But if it malfunctions, we slam on it and it is destroyed, then our economy comes to a standstill." (Reporting by Gergely Szakacs; editing by Stephen Nisbet)