János Lázár, Fidesz politician and speculator

János Lázár, in addition to being the leader of the huge Fidesz parliamentary delegation, is also the mayor of Hódmezővásárhely. Don't think that Hódmezővásárhely is exactly a metropolis. It is a small town with a population of 40,000. The population might be small but its debt load is enormous. In fact, in the last three years it has grown from 16.3 to 20.7 billion forints. That means that every inhabitant of Hódmezővásárhely owes half a million forints. The Government Accounting Office (Állami Számvevőszék), which just lately looked over the city's finances, recommended that János Lázár devise "a program that would immediately remedy the financial situation of the town."

Under the circumstances János Lázár needed a lot of assistance, and he figured that the softest touch was the lender itself. After all, banks agreed to modify individual mortgages, so perhaps they would help out municipalities as well. He wrote a letter to Radovan Jelasity (Jelašič), CEO of Erste Bank, to which the town owes the bulk of its debt. The town's association with Erste Bank began in 2006 when Hódmezővásárhely issued 694 municipal bonds each worth 100,000 Swiss francs. That means a whopping 69,400,000 francs. At the time one Swiss franc was worth 173.41 forints; at the end of 2011 the exchange rate was 251 forints to 1 franc.

János Lázár pretty well told Jelasity that his bank either shares the losses the town incurred as a result of its exchange rate hit or else. He gave Jelasity one month to make an "offer." "If there is no cooperation," he threatened, "the leaders of the municipality will turn to the Hungarian parliament for assistance." Lázár made no bones about it: if necessary, parliament will change the law in order to force Erste Bank to share the town's losses. And considering that Lázár is no ordinary lawmaker but the most powerful man in the current parliament, the threat was anything but idle.

I read two noteworthy comments in connection with this letter. The first was by Mátyás Eörsi, earlier an SZDSZ member of parliament and now a member of DK (Demokrata Koalíció), who compared Lázár to the leader of a gang (egy külvárosi gengszterbanda feje) who dictates his terms. The other commentator, Zsófia Mihancsik, editor-in-chief of Galamus, was certain that what Lázár did in this letter amounts to the misuse of office (hivatali visszaélés) which according to the Criminal Code is punishable by a three-year prison term.

Radovan Jelasity took his sweet time and wrote an answer on the very last possible day, January 31, 2012. It seems that the head of "the gang" didn't frighten the CEO of Erste Bank. He offered János Lázár a deal that he had to know the town couldn't honor. If Hódmezővásárhely is willing to pay ten billion forints in one lump sum, he is willing to negotiate about the fate of the other ten billion.

Lázár was outraged and complained that "this ultimatum is a clear signal that Erste Bank doesn't consider the citizens of Hódmezővásárhely partners but only debtors." In his opinion, under the present circumstances the banks must assume their share of the losses and they must work together with the municipalities. May I ask: what are the citizens of Hódmezővásárhely if not debtors? 

Today Lázár also gave an interview to the far-right Magyar Hírlap which ran the article under the headline "Implacable banks." By that time Lázár claimed that "foreign banks are initiating a coordinated attack on the municipalities because their goal is to force the central government to consolidate municipal debts."

Simultaneously with Lázár's interview in Magyar Hírlap, Napi Gazdaság came out with an interesting article. It turns out that the municipal bonds Hódmezővásárhely issued in 2006 brought in 69,400,000 Swiss francs worth 12,034,654,000 forints. The interest rate was low and the exchange rate was favorable. A year later, in August 2007, Lázár himself proudly announced that the town had invested the money in currency transactions and as a result had received a handsome profit of 1 billion Hungarian forints. The town, that is, engaged in a series of currency carry trades, a strategy in which an investor converts the currency of a country whose bonds have a relatively low interest rate into the currency of a country whose bonds yield a higher interest rate. The investor buys the higher yielding bonds with the "cheap money" (usually using leverage) and will make a profit amounting to the difference between the interest rates as long as the exchange rate between the two countries remains constant. 

According to Napi Gazdaság the town of Hódmezővásárhely played this high risk game for a number of years. The city council entrusted Lázár to continue the carry trades as long as he found them profitable and advantageous. And he did. In 2009 the Government Accounting Office reported that during 2007 and 2008 Hódmezővásárhely received another 1.611 billion forints as a result of these transactions.

But then came the fall of 2008 and with it the financial crisis. Hódmezúvásárhely lost as much money in its carry trade activities after that date as it had gained in the prior two years.

In his interview with Magyar Hirlap Lázár was still in a belligerent mood. He is planning to sue Erste Bank. In addition, he will ask the council to consider asking for help from the government and from parliament. Thus, he still hasn't given up on his idea of changing the law in order to save his skin in Hódmezővásárhely.

I don't know how successful Lázár will be in convincing Viktor Orbán to endorse his law-changing plans, but I'm rather skeptical about his luck there. Viktor Orbán would find it mighty difficult to defend such a move just before his negotiations with the IMF and the EU. He has enough trouble as it is. As for the courts, if we still have an independent judiciary by the time the case is heard, I somehow don't think that Hódmezővásárhely would win against Erste Bank.

So, here is poor Hungary, attacked not only by those hateful foreign speculators but also, it seems, by speculators from within the government party ranks. 

Comments

[Paul]

Thanks Éva, interesting stuff.

I've no idea how much a city of 40,000 people costs to run, but that it should need a loan of 69.4m CHF, on top of its normal sources of revenue, strikes me as rather odd.

What was this money for? Was it borrowed just to make money on the currency markets? Again, this seems very odd - certainly dodgy, if not illegal.

As you say, I can't see VO bailing them out with changes to the law, under the current circumstances, even if he wanted to. So what is Lázár going to do?

And where does this current Hungarian madness of blaming the banks for loans they took out in full knowledge of the risks they were taking come from? Even by 'normal' Hungarian standards of needing always to blame someone else for everything, this seems a bit bizarre. Especially as Hungarian banks didn't play the same role in the 2008 collapse as they did in (e.g.) the UK and the US.

And one other question, slightly OT - how come major local politicians who take national government positions, seem so often to retain their local positions as well? This just doesn't happen in the UK. If you are a local councillor and you win a seat as an MP, you automatically resign your council seat.

I don't know if this is required by law or not, but even if it isn't, it makes sense, as it's simply impossible to do both jobs. How do Lásár and Kósa (for instance) manage to be top Fidesz politicians AND city mayors at the same time?

[CharlieH]

London Calling

Eva! Quick add three zero's to your

".... in 2006 brought in 69,400,000 Swiss francs worth 12,034,654 forints."

I think it should read 12,034,654,000!

Just for completeness and integrity of your article and for your many readers.....and erase me now!

We wouldn't want it looking better than it actually is now would we?

Erase me! Erase me! Erase me!

Regards (auditor!) Charlie

[Eva S. Balogh]

CharlieH: "I think it should read 12,034,654,000!"

Thank you, fixed.

[Mutt Damon]

Oh, boy. "Nomen est omen". Messing with Austria and Jelasic (Jelacic) again spells another lost revolution ...

It was a well known fact that the mostly FIDESZ dominated municipalities were constantly engaged in "gambling" (Orbanist terminology) with currencies and other stock market maneuvers. What I would like to know is who were the participants in these deals and whose pockets the portion of the profit landed in. There are a lot of rumors that a big chunk of these short term currency deal gains were pocketed by companies close to the FIDESZ. It really seems that these guys just used the creditworthiness of these cities to borrow a lot of gambling chips.

[GabeGab]

Off the topic, sorry.

Eva, liberal minded Hungarian-Americans should check the letter of Bela Liptak that supposedly he wrote in the name of the "Hungarian Lobby" to the White House. There are several reports about it in the official Hungarian media (MTI).

First, it's funny that one cannot find any trace of this letter in the American press or on the web. (No word about this on the website of that "Lobby".) Second, I am outraged that that "Lobby" speaks in my name. Should not we consider writing a letter/petition supporting the Clinton letter? I might be able to find quite a few sponsors. (If anything I found the letter too timid, but I agreed entirely that the administration expressed this opinion.)

[Odin's Lost Eye]

Off topic. This is a test posting. I have been unable to post since 03.33 am 02/02/2012

Even in 2006 I cannot see what on earth Erste Bank was doing by taking up the 694 bonds of 100,000 Swiss Francs from a town the size of Hódmezővásárhely.

How on earth did the town’s negotiators justify this huge sum (over 69.4 million Swiss Francs) for 40,000 people? That is 1735 Swiss francs per head of the population. How could it be paid back by the people? These negotiations must have occurred at a very high level in Erste Bank. I smell rotten fish on both sides of this transaction.

There is a second question where was such a huge sum lodged? If I were Erste Bank I would have insisted it be held in an account within the bank. If I was the manager whose bank that deposit was in I would keep a ‘very beady eye’ on every transaction on that account. How much was withdrawn and who was it paid to. If it was in sums of cash I would smell a very large rat.

I know a copper (now retired) who would have loved to audit the Erste Bank transactions and those banker executives involved.

There is something rotten in both the states of Erste Bank and the leadership of Hódmezővásárhely.

[CharlieH]

London Calling!

I think you should be very careful when you start to blame the bank here – Erste Bank.

At the root of all this is the integrity and professionalism of the government and municipal authorities, including their auditors and professional associations.

Business to business is hard-nosed and tough and treasury transactions are conducted through professional specialists. They are always, always gauging the risk taken with appropriate hedges built in – we are not dealing with naïve householders here and if the market moves against you, you can't throw your toys out of the pram.

There is a role too of the financial regulator.

It is quite likely that there are many councils who were doing the same thing and if they were just taking one-way bets then - as much as you might like to – you can't blame the banks. They have a right to expect a level of professionalism. And expect you to honour “the sanctity of the contract”. Be careful what you sign.

You can't expect the Bank to 'audit' your every move – they don't have the resources. It is very fashionable to blame the bankers, but if you look at the capital tied up in their businesses there is often very little return. (The gambling that they too indulged in in the recent past is another blog for another day.)

Money is just another commodity - just like chocolate. Cadbury's buys forward contracts of cocoa and gambles that the price moves will be in its favour. Win some loose some - but its supply of chocolate is contained within a price band.

If you gamble and lose, tough. If you don't have the mechanisms in place to protect your business and ratepayers - tough too. There are the usual mechanisms available – bankruptcy and administration. If you are a politician you get voted out. Capitalism and democracy allow you the freedom to slash and burn.

Capitalism and democracy red in tooth and claw.

I know I won't be popular! - But don't blame the banks.

Regards Charlie

[Living with it in Hungary]

"They are always, always gauging the risk taken with appropriate hedges built in"

In this case the hedge was in the interest rate spread between HUF and CHF loans. If you can't read that sign you need to stay out of the markets.

[Odin's Lost Eye]

CharlieH both you and I know that Municipalities are not businesses. They are NOT allowed to trade as they, their elected representatives, and their servants have a duty to protect the municipality’s funds and their population.

Certainly they may deposit their surpluses with banks (and are expected to do this). Bankers know this. The Municipality will have professionals on their staff to handle money but handling such large amounts.

I know that where a loan of this type has been made banks have to monitor large withdrawals made in what becomes an untraceable fund. They also have to monitor similar (unusual) deposits made in the form of untraceable funds. Banks do this to cover their tails against charges of ‘money laundering’. I worked on the design of an ‘Expert System’ which did just this.

One of the questions I raised as this was huge loan how were the bankers convinced to make it and against what co-lateral?

You can have all the experts you can shake a stick at in a long day but unless you have a valid justification how can you borrow 1735 Swiss Francs for every person in your population. You write the “and treasury transactions are conducted through professional specialists”. Certainly they are, but these folk are ‘Professionals’. SO they must have some form of convincing justification for such a loan and that is my problem.

Hódmezővásárhely is a small town not a specialist Forex trading company. This is what made me very uneasy

[Eva S. Balogh]

GabGab:"liberal minded Hungarian-Americans should check the letter of Bela Liptak that supposedly he wrote in the name of the "Hungarian Lobby" to the White House."

Lipták is making a lot of noise with this nonsense in Hungary. He was interviewed on Echo TV (where else?) and claimed that behind this letter there are 1 million!!!! Hungarians in the United States.

This nonsense was repeated by some right-wing "political scientist" and an expert on the United States.

The Hungarian Lobby has been in existence at least for twenty years and it is a misnomer because it lobbies only for right-wing causes. Every time an article appears in a paper that is not kind to Fidesz or this time to the Orbán government he writes a sample letter to the editor which his followers copy and send off to the newspaper in question. Most of the time the papers refuse to publish these letters.

I have been thinking about straightening out the Hungarian public about Hungarian Lobby and that these people represent nobody.

[Eva S. Balogh]

I see that László Bartus (Amerikai-Magyar Népszava) already wrote an article about Lipták's letter in Népszava:

http://www.nepszava.hu/articles/article.php?id=517393

[Kingfisher]

I see that Lázár is now claiming that when they were making money with their "investments", the profits were shared with Erste Bank.

http://www.origo.hu/itthon/20120203-a-nyeresegen-is-osztozott-lazar-az-erstevel.html

I find it very hard to believe but look forward to enlightenment from those who understand this stuff.

[An]

@Kingfisher; Lazar says a lot of things (and mostly distortions and lies)... I'd only believe him of he could back it up with something.

[Paul]

Éva - this letter of Bela Liptak's is big news in Hungary - at least in the Fidesz/Jobbik supporting part of Hungary.

My mother-in-law was asking my opinion of it on the phone the other day and was quite convinced that I was being politically 'forgetful' when I said I'd never heard of it.

She was quite convinced that it not only was it widely read and publicised in the West, especially in America, but that it had caused a political earthquake.

Such is life (and 'news') on Planet Hungary these days.

[Paul]

And OT, but on the same theme - tonight my wife has been watching Hungarian news on the Malév debacle. And (predictably, but sadly) tells me that it was all the EU's fault.

When I pointed out that national flag carriers were a huge millstone round a small country's neck and only a terminally insane government would have bought Malév back after the previous government had been lucky enough to get rid of it, she responded by blaming Gyurscány for selling it!

Of course Orbán wanted to buy it back, she explained, it was Hungary's NATIONAL airline.

(My reply to this wasn't particularly coherent.)

[Paul]

Back OT - in the UK, local councillors have a legal liability for debts, etc they have taken on on behalf of their town/city. They can (and are) taken to court and ordered to repay the debt personally.

Of course this doesn't happen too often, but it DOES happen where particularly stupid decisions have been made. And it serves as a very serious warning to councillors not to spend 'our' money irresponsibly.

I take it something similar doesn't apply in Hungary?

PS - and I'd still like to know why a smallish city needed to borrow such a huge amount of money. What did they need (or say they needed) it for? Can anyone enlighten me?

[GDF]

Paul:"And where does this current Hungarian madness of blaming the banks for loans they took out in full knowledge of the risks they were taking come from?"

Well, this is the same story everywhere. In the US the banks are being blamed for the fact that millions borrowed above their means and now are being evicted from their houses, because they can't pay. All these borrowers signed papers containing all the conditions of their loans but still, the real estate crisis is the banks' fault.

[GDF]

And to add to my comment above: in the US mortgage crisis the problem wasn't the drop of the value of the dollar (as in Hungary) but the drop of the real estate valuation. Not much of a difference, in both cases everyone thought that things only go up, while it is well known that what goes up, will eventually come down.

[Paul]

GDF - I think with the situation in the UK and the US, there is some validity in the argument that the banks were to blame, at least partially.

But this does not apply in Hungary. The Hungarian banks did not indulge in the same dodgy tactics and thre wasn't anything like the same market for crazy mortgages.

2008 might well have been the banks' fault, but not the Hungarian banks.

[GDF]

Paul, I doubt anyone can convince me about the bank's fault of the real estate crisis. Maybe it is partially (although a small part) their fault, I buy that. It was the Congress that empowered the two quasi-governmental agencies (Fannie mae and Freddy Mac) to back mortgages to poor people, to generalize the American dream of owning a house (this was done through government guarantees on these loans, now we, the taxpayers are paying for the two bankrupt agencies' obligations). The banks just took advantage of this, who wouldn't?

The bottom line still is that all the borrowers took those loans knowing and accepting in writing all the conditions. Now they are abandoning their "under water" houses by the millions (the hosues are worth less than the outstanding loan balance), even if they could pay. And the banks, those villains, are left with the loans. Or those who bought those loans from the banks. There are millions of abandoned houses and the taxpayers are paying for them.

Thank Congress and Clinton, not the banks.

[enuff]

Last summer when we visited Hódmezővásárhely (after three years), the centre looked clean and shinny.

And if you read their website, there are a few restoration projects for cultural / tourism purposes. I thought such projects are usually funded by EU.

Still unsure why the town needs so much credit.

[kormos]

@Paul
"The Hungarian banks did not indulge in the same dodgy tactics...."

But banks in Hungary did. Just look around Debrecen. How many banks are there? Take a look at the overhead. They must hoped and got extra profit.

[Kingfisher]

The argument is that they need cash in order to win matching funding from the EU for various projects. But it is hardly a well kept secret that these local governments borrowed far more than they needed to enable them to play the markets etc.

[riviera1]

@ Malev

How dare a government pull the rug out from under travelers without warning? Shouldn't they have given a month's notice or something? I can't believe the bare-faced brutality of the Orban regime. There is one explanation though: the Malev sudden stoppage reminds me of firms going suddenly into bankruptcy. They sell off their inventory and still the suppliers. Sounds like the Malev boys are absconding with
some sizable funds while the getting is good....and the traveling citizens be damned.

[Eva S. Balogh]

Paul: "this letter of Bela Liptak's is big news in Hungary - at least in the Fidesz/Jobbik supporting part of Hungary."

Bela Liptak is a joke and so his group, Hungarian Lobby. Some eighty or so people signed a letter to Obama. And what? They represent absolutely nobody.

And then I didn't say anything yet about the one and a half million Hungarians in the United States. What nonsense!