It was more than a year ago that Lajos Kósa, fortified by Péter Szijjártó, informed the world that Hungary was close to financial collapse. The Fidesz government had inherited a near bankrupt state and soon enough Hungary will follow Greece. The news was taken seriously in the world of finance and for a few days the announcement made an impact on the entire international market. Kósa tried to minimize his role in the fiasco by claiming that it was impossible that a mayor of a mid-sized Hungarian city can shake the global markets. What he forgot was that he was also one of the vice-chairmen of Fidesz, the ruling party, and in the absence of the prime minister, who happened to be in Brussels, he was speaking in his place. And, let’s face it, the real culprit was not the insignificant mayor of Debrecen because we know that nothing happens in that party without explicit instructions from Viktor Orbán, chairman of Fidesz and currently prime minister of Hungary.
In the aftermath of the dire comparisons to Greece, the euro/forint cross spiked to 290. Today’s 1.5% move with a close around 280, though it didn’t reach the levels of last summer, nonetheless demonstrated a growing aversion to buying forint-denominated assets.
And today OTP (Országos Takarékpénztár), Hungary’s largest bank, lost a hefty 10.69%. At one point the exchange had to suspend trading in OTP because of its precipitous fall. What happened?
This time János Lázár, another illustrious mayor of a smallish provincial town, Hódmezővásárhely, and more importantly the leader of the Fidesz parliamentary caucus, announced to the world that the government is contemplating a plan to assist distressed foreign currency debtors. He said that “he is proposing to the cabinet to allow the repayment of these debts in a lump sum at a fixed exchange rate.” The entire debt could be paid off at a rate of CHF/HUF 180 and EUR/HUF 250. The difference between the “real” rate and these arbitrary ones would be borne by the lending institutions.
This announcement came out of the blue. The government didn’t consult with the Banking Association whose secretary, János Müller, has no idea about the financial consequences of such a measure. If a lot of people opted for it the banks would be looking at massive losses, hundreds of billions of forints. But most likely the banks would take a minor hit because relatively few people would be in a position to pay off their whole mortgage at once. It seems to me that this latest move of the government is no more than an attempt to bolster its popularity. Until now debtors affected by the unfavorable exchange rates were largely disappointed in the Orbán government which promised a lot and delivered practically nothing. Perhaps this latest move is an attempt to demonstrate a renewed effort to save the heavily indebted population.
However, the reaction of investors was swift and largely negative. Peter Attard Montalto, the analyst at Nomura International in London who specializes in emerging markets, thinks that “this might only work for a small select bunch of people who have less than two years left in their mortgages. However for anyone longer than that it looks impossible. The average time to maturity of foreign exchange debt is around eight years or so.” All in all, he thinks that “this is another bad step along the road on this issue with negative headlines and is probably only the tip of the iceberg on these ‘get revenge on the banks and the last government’ schemes.” Some analysts figure that the loss to Hungarian banks might be 2.5 billion euros.
The Hungarian Central Bank’s criticism of the scheme was only indirect. The bank’s announcement stressed that “only such a solution can be devised for the assistance of the debtors that doesn’t endanger the stability of the country’s financial structure.” The chairman of the central bank, András Simor, a few days ago asked for an interview with Prime Minister Orbán who refused to see him and instead sent the bank chairman to György Matolcsy, minister of the economy. Simor apparently had a list of possible solutions to the problem, but given Orbán’s less than friendly attitude toward Simor I very much doubt that the government will pay any attention to his ideas.
The final decision on the issue will be reached only on Sunday, and it is possible that the negative reaction of the markets to the announcement will be sufficient for Viktor Orbán and György Matolcsy to change their minds. Although by now I have given up all hope when it comes to this government’s decisions that seem to go against rationality and common sense.