Gathering storm in the Hungarian economy

First the analysts of UniCredit in London suggested that the Hungarian government might as well crawl back to the IMF and, like Poland, ask for a kind of security loan just in case. Then Nomura sent the same message from London. Now these two are joined by the analysts of Bank of America Merrill Lynch. They warn that there are "extraordinary risks" in Hungary for investors. They claim that the Hungarian government's economic policy lacks credibility and that the financial consolidation is slow and erratic. In addition, of course, there is the European financial crisis that doesn't seem to be coming to an end any time soon.

The advice Merrill Lynch is giving to the Hungarian government is unlikely to be heeded. According to the analysts cooperation between the central bank and the government should be closer. Given Viktor Orbán's hatred of András Simor--you may recall he tried to make his life so miserable that Simor would quit, it is unlikely that the prime minister would turn to Simor to coordinate economic policy. The second piece of advice is closer cooperation with the members of the European Union. After all, the banks of the eurozone are heavily involved in the Hungarian economy. This too is unlikely. Just today the prime minister announced his intention of "pushing off [elrugaszkodik] from the Eurozone." (In the last few hours everybody has been trying to figure out what this "pushing off" means exactly.) Third, they suggest sitting down with the IMF and negotiating a loan as an insurance policy.

Yesterday an important article appeared about the Hungarian mortgage crisis by Neil Buckley, the East European editor of The Financial Times. The Austrian and Italian banks "urged Brussels to investigate what they claim is a breach of European Union rules that could set a dangerous precedent." He is referring here to the government's decision to allow borrowers to repay their mortgages in full at a more favorable exchange rate. To give you an idea of the magnitude of the problem here are a few figures. Foreign currency mortgages total 5.2 trillion forints. If only a quarter of the borrowers decide to take advantage of the opportunity offered and pay back their mortgages, there would be a 20-25% loss for the banks. That amounts to 250 billion forints. The banking system was already in trouble before this latest government assault. As a result of the extraordinarily high bank levy imposed on them, their profits last year were only 10-12 billion forints and most of that was generated by OTP, the only large Hungarian bank. If the parent banks in the eurozone don't provide more capital to their affiliates in Hungary there will be serious problems with lending, which already shrank by 700 billion forints between the summer of 2010 and the summer of 2011.

An economic crisis may be developing because savings far exceed lending. Banks are protecting, even trying to shore up, their balance sheets--a wise decision given uncertainty in the Eurozone and a rapacious Hungarian government. But without credit there can be no economic growth. Indeed, investment has slowed. Earlier, economists were hoping for a 2-3% growth in investment but the latest release of data by the Central Statistical Office shows a drop of 6.9%. Thus the hope of a speedy recovery is most unlikely.

Mária Zita Petschnig, an economist at the Pénzügykutató Intézet, told a reporter for Népszabadság (September 27) that until the change of government (April-May 2010) there were signs of a recovery. Investments grew by 4-6% just as in other European countries. But in the second quarter of 2010 Hungarian investments not only slowed but came to a halt. Petschnig described the situation dramatically. When lending comes to a halt there is only one thing to do: kneel and pray because the end is near.

According to this analysis the Orbán government's economic policy, if one can call it that, is the cause of the slowdown in the economy. Public works that functioned reasonably well during the socialist regime came to a temporary halt, which meant more people without much purchasing power. The new government stopped all PPP (private-public-partnership) investments. Half finished projects were abandoned. The so-called retroactive "crisis taxes" undermined trust in the Hungarian legal system. There were too many ad hoc decisions that made the economic environment unstable. After a brief initial enthusiasm among foreign investors interest in Hungary waned and credit default swaps (CDS), a kind of insurance policy for bond investors, became more and more expensive.

Because of the misguided introduction of a flat tax the budget has been in serious trouble despite the windfall income from the nationalization of the private pension funds. Even the 2011 budget had to be amended several times, and the figures released for 2012 will most likely be impossible to stick with. Economists expect constant fiddling with the numbers throughout 2012 because the budget rests on shaky foundations. Even Zsigmond Járai, a government yes man and a member of the so-called Budgetary Council, said that most likely there would be a need for the introduction of further taxes. That is over and above those taxes that were introduced in the last month or so. Moreover, according to analysts the tax revenues for 2012 are overestimated by at least 140 billion forints.

All in all, the Pénzügykutató Intézet forecasts an economic growth of 1% for 2012, but they don't rule out the possibility of a recession either.

While The Financial Times describes the general outcry of foreign banks against the Hungarian government, saying that "this early repayment act is clearly an interference with private contracts ... and the general feeling is that Hungary is not going in line with the European environment it operates in," until now Sándor Csányi, president of OTP, was quiet. But yesterday even he, a great friend and supporter of Viktor Orbán, felt he had to say something. Of late Viktor Orbán has repeatedly defined one of his causes as "waging war against the banks." He threatens to put an end to the world that was ruled by banks. I guess this was too much for Csányi. He warned that "if the government's intention is fulfilled and it beats the banking industry, it will actually defeat itself." He's spot on: the Orbán government's policies seem to be self-defeating.

 

Comments

[Ron]

For me I look at the lower levels. For the 15 plus years that I live in Hungary the business that was always doing well was the Kocsma.

Today, for the first time, I noticed that the Kocsma around the corner from where I live, and which I pass every day, was closed. A big sign with kiado.

Also today, I went to a kocsma, and realised it was very quiet. Mind you it was 26 degrees celcius, the terrace was open and four o'clock in the afternoon, but only three people were there, me, my friend and a colleague.

As I have been here before when it was thriving, I asked the lady in charge what was going on. She said that most of her clients do not come as they cannot afford to drink a beer.

If they want to drink alcohol they are going to a ital discont around the corner, where they buy half a shot of alcohol with water and aroma. Apparently, that is all they can afford.

She said that if this keeps on going the kocsma will closed down somewhere in 2012 (she mentioned it also had to do with renewal of the rental agreement).

Of course the side effect is that the doctors will be happy, as there will be less alcohol consumption. But is this a healthy situation. I wonder.

[Vladimir]

Am hearing that the consequences of mortgage repayment plan could be very bad for some of the financial industry as insurance companies and voluntary pensions could be allowed to be drawn to pay for these Swiss Franc mortgages as part of Orban's plan. Naturally the better off will take advantage of this discounted mortgage and withdraw their monies. This could very well leave these insurance and pension companies with much less capital to operate.

I've always believed that part of the long game for Fidesz is to make the situation here untenable for the big multinational financial corps so that the Fidesz-loyal (and Chinese) finance corps can get in at the bottom. Sure Csanyi is saying that OTP is being hurt, but his personal wealth is secure and the stockholders are overwhelmingly not Hungarian.

Also some of Matolcsy's plans might include favouring Hungarian-owned firms with less taxes. Not sure about the details yet, but we may know more in the next week or so.

[moreinfo]

I recently visited Hungary and saw full terraces in Budapest until 1-2 am at night and the same in another city. I was even surprised of the happy atmosphere when we all know that the country is close to its end.

[An]

@moreinfo: I guess it depends where you go. I was visiting Budapest not long ago, as I do every year, and the deterioration in the working class areas and off-tourist spots is visible. Stores are closed, things are looking more run down than just a year ago. The touristy places seem to be doing fine, especially that some EU money is being spent on the inner parts of the downtown area, along the main tourist routes. And then, going out to Moszkva (now Szel Kalman ter), where Buda hills start and where the more affluent population that lives in the hills go out for shopping, seemed to be thriving. I had the feeling that the gap between the haves and have-nots is becoming more striking. And the average Hungarian is slowly sinking down to the ranks of the have-nots.

[Paul]

An - my experience in Debrecen is pretty much the same.

When this latest financial crisis hit a few years ago, I was impressed at how well Hungary seemed to be holding up. A new upmarket mall had just opened in Debrecen and seemed to be trading well, and the shops in the more traditional areas seemed to be coping too. Quite a contrast from here in the UK, where increasingly there were gaps in the malls and high streets.

A year later, it was much the same and I began to speculate that maybe it hit the UK harder because we were much more into the 'living on credit' madness - the richer you are, the harder you fall, maybe.

But this year I noticed that shops are closing - but almost exclusively in the less upmarket areas. The expensive shops in the new mall are all still there, and seem to be doing OK, but there are noticeable gaps elsewhere.

The traditional shopping areas and the other, smaller shopping centres have also lost their main attractions (shops like Humanics, M&S and Media Markt), as these have moved to the new mall, where the footfall is healthier and richer. The older malls/areas are left with very large (i.e noticeable) gaps and an abandoned, left behind atmosphere.

Just out of interest - one difference I really noticed, compared to the UK, is that over here, these empty shops tend to get taken over by charities and 'under a pound' type shops. But this doesn't happen in Hungary, there seems to be no history of charity shops and the cheap chains and one-off local 'pile it high and sell it cheap' shops that we have here in abundance, don't seem to exist in Hungary either.

[Some1]

@moreinfo. the tourist places are doing great. Tourists have $ and EU, and their money goes a long way now.

[Paul Hellyer]

To add my tuppence worth: When visiting Hungary in June this year I was surprised at the number of pensioners looking through rubbish bins outside apartment blocks. This was in the relatively well-off town of Vác. Clearly they were looking for anything to supplement their meager incomes. This was not the case on my previous visit in 2006. I found it very sad.

[Rigó Jancsi]

It's not only the beer in the kocsma. If you talk to the service personnel at gas stations, they will tell you that the number of people who drive into Budapest by car has dropped significantly during the last year. Of course, that's just their feeling, not statistics. But with an even higher mineral oil tax, the effect will be visible for sure. Now, this would be great news for BKV, but they are on the brink of collapse, too, and still use historic Pegasus busses that should rather be in the museum and which break down all the time, not even mentioning burning metro trains.

[flogger]

Dear Eva,

I'm a new reader here, and admire your dedication to the issues in Hungary. As a PR here, I learned so much from your posts.

That said, I wonder how many Hungarians (those fluent in English) care enough to take time to read your blog, which is a shame.

[Lutra lutra]

Did Orbán actually say he was "waging war against the banks", as reported in the FT article, or is this a mistranslation or part of a longer sentence taken slightly out of context?

[Eva S. Balogh]

Dear Flogger,

First, thank you for your compliment. I appreciated it. Second, when I decided to start Hungarian Spectrum I was thinking mostly of assisting people without knowledge of the language to learn something about Hungary. However, there are a lot of readers from Hungary who are not necessarily Hungarian-speakers. Foreigners who live in Hungary.

I used to write in Hungarian for Galamus (wwww.galamus.hu) but I just don't have enough time. Moreover, there are many very good sources available in Hungarian.

[Eva S. Balogh]

Lutra, lutra, No mistranslation. That's exactly what he said. He promised that he would be victorious over the banks.

[Eva S. Balogh]

Here is another article that reports on the sorry state of the Hungarian economy and its prospects: http://tiny.cc/revig

[Eva S. Balogh]

I just found out that 168 Ora will be publishing some of its articles also in English. Here is the first one, an interview with Paul Lendvai:
http://www.168ora.hu/globusz/bank-robbery-83154.html

[Paul]

Thanks for the link, Éva, always good to have more stuff in English.

On a related point, I used Google to translate the Pusztaranger blog the other day* and it produced almost perfect English. So English readers of HS - don't be put off by sources in other languages, as so often, Google is your friend!

Unfortunately, it doesn't really work in Hungarian. The resultant translation is so poor that it's often difficult to work out which side they are agreeing with!

*The atrticle I was checking out was about MPs who will benefit from the new Swiss franc mortgage law - well worth looking up: http://pusztaranger.wordpress.com/2011/09/21/fremdwahrungskredite-der-ungarischen-abgeordneten-laut-ihrer-einkommenserklarungen/

If that's a bit dry, there's a nice graphic from Népszabadság Online that shows jut how many snouts could be in this particular trough: http://www.nol.hu/lap/mo/20110806-kosa_es_rogan_cipeli_a_legnagyobb_adossagot click on the graphic and it opens in a separate window, much larger and easier to read.

[Johnny Boy]

"Bank robbery", this is good, I like it.
Seriously.

But why is it all left out that the banks in Hungary lent money at twice the interest rate in the same construction than in W-Eu countries, for they had no regulations at all to adhere to?
Why is this always omitted when crying for those poor banks who all realized profits even in the worst years of the crisis?
Nice leftist behavior to cry for the banks, by the way, but what else can you do if you want to hurt the government?

[Paul]

As for poor people and bins - we had a few episodes recently where our bins had been opened and bags taken out and opened. I just assumed it was cats or foxes, as it would have been in the UK, but it turned out that it was people going through our bins to see what they could find.

As there are several families with young children in our block, a large part of the content of these bins is disposable nappies, and you can imagine the smell after a week in Hungarian summer temperatures. You have to be pretty bloody desperate to go through bins like that.

[Mutt Damon]

@Johhny "same construction than in W-Eu countries"

What is the "same construction"? Same currency, same term, same credit rating?

[wolfi]

Ron, regarding "there will be less alcohol consumption", I'm sorry but you're probably wrong!

People will drink at home - maybe that moonshine that they're now allowed to make ...

Any way I helped my neighbour with the harvesting of the grapes (all 1500 kilos of them, but we were a lot of people and it was a kind of party, having a nice goulash at the end ...) and the next day he told me that one of his neighbours had asked for water to add to the törköly (marc) to get more wine ...

Even the tourist traps here around Héviz are having problems, several restaurants in Egregy have been empty the last year and the proprietor of one that is still open complained to us about people's reluctance to pay good money for a good service.

willt

[Some1]

Paul Hellyer:"I was surprised at the number of pensioners looking through rubbish bins outside apartment blocks."
Fear no more! Fidesz and their true supporters wage a war against the poor. Looking through the garbage is outlawed in Budapest and a few days ago from taxpayers money they held a referendum in the eight district to get to know if sleeping on the streets and going through the garbage should be kept illegal. Only 16% of the people bothered to show up (10,000) for such a shallow and pitiful vote. THis did not deter the Councillor of the 8th District to claim victory. He proudly announced 90% who showed up agrees with the war on the poor, so be it.
Now, what happens if they find you going through the garbage or sleeping regularly outside? You will either go to jail or have to pay a hefty fine. THe logic of Fidesz at work.

[Ron]

Mutt Damon: @Johnny "same construction than in W-Eu countries"

What is the "same construction"? Same currency, same term, same credit rating?

The interest rate charged by banks to their clients is normally build up of the base interest rate (the rate the banks have to pay), a profit margin (normally around 2%) and the credit risk premium.

The latter is based upon the chance that client default and/or foreclose and other costs such as re-finance/hedging costs. In Hungary the rate for default/foreclose use to be (in 1997) 4 to 10%.

[Ron]

wolfi:Ron, regarding "there will be less alcohol consumption", I'm sorry but you're probably wrong!

Sorry but i meant less good quality alcohol consumption. I am pretty sure the consumption remain the same or even increase, but the alcohol will be home brewed or pure alcohol, mixed with water and aroma (as described in my first comment).

[Some1]

Johnny Boy: "But why is it all left out that the banks in Hungary lent money at twice the interest rate in the same construction than in W-Eu countries, for they had no regulations at all to adhere to?"
Because Hungary is one of the riskiest countries to lend money to. Also, because the money is tied to other performance factors of the local economy. Basic investment facts. By the way, Orban just proved the banks point! THe risk is higher than they were thinking, but lucky for Orban's friends it will be the poor who will be hit for allowing the rich paying back their loan under more favourable terms.

[Some1]

In the interview with Paul Lendvai there is a paragraph that sounds extremely interesting:
" The time has to come when the political support of the People’s Party the Orbán government has been relying on will diminish. And its impact will linger even if the government hires an expensive PR company in London. And even if they try to threaten or buy Western journalists. You cannot get off that cheap, because it’s no longer about money, but the state of law and principles. "

The part that sticks out to me "even if they try to threaten or buy Western journalists. " It is obvious that Lendvai refers to something here. We all have our suspicion about who the journalist that were bought, but who is he maybe referring to as threatened?
I also asked a few times, and I am not sure if anyone has the answer, but maybe someone does, how much does it cost for the taxpayers the London PR firm Orban hired?

[Odin's lost eye]

Oh dear Johnny Boy. Your knowledge financial affairs are sorely lacking, as is your knowledge of normal commercial practices.

The interest rate charged has three components. The first part is the commercial rate which is what the borrower is willing to pay. It contains the Central Bank lending rate, the bank’s profit margin and sometimes an administration charge.. The second part of the interest rate reflects the risk. The higher the risk of the borrower defaulting on repayment the higher this component of the interest rate becomes. Read what Ron has written – he is quite right.

How can I put it? In the matter of borrowing money it takes ‘two to tango’. By robbing the lender the Hungarian Government (and of course its leader ‘the Might One’ (O.V.) no less have now destroyed the rules of contract. I believe there is quite a long term in gaol for committing a ‘bank heist’. I wonder if the ‘Mighty One’ will stand trial for it? The great Hungarian bank robbery has begun.

If I were selling things to Hungary I would want Cash against the Pro-Forma Invoice before I made shipment.

Ron you are correct. There has been a huge drop in the consumption of lawful beers, wines and spirits. Two of the four local Kocsma and one ‘of them places’ have closes. The other two are in a doggy condition. Some of the regulars of one of the Kocsma were complaining bitterly that when they went in to work on Monday their work place was closed and empty. I went down on Tuesday (yesterday) the place totally cleared. Everything was gone. So it seems was the boss. They have not been paid fully for the past three months and they will not get anything this month.

Professor you wrote ** “(In the last few hours everybody has been trying to figure out what this "pushing off" means exactly.)2 **. The way it is translated it means that the Mighty One is going to take Hungary out of the European Union!