Another financial disaster: Who is the culprit?

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.

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“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.” It’s very well possible that the whole fuss was just about probing the markets about the ideas. On the other hand I’ve been expecting something like this for a while. I bet Orbán is extremely frustrated that his range of motion is constrained by the masses of people swimming in Swiss Frank debt (I’d be too). I still don’t agree with this for several reasons: 1. Obviously, the collapse of the bank system is a real danger. For JB and some others: I agree that the banks have been behaving disgustingly about this and that they lured naive people to get indebted in foreign currencies. But here the issue is about the banks and not the bankers and unfortunately the fall of the latter would have disasterous consequences. 2. People did take out those loans irresponsibly, and they let themselves to be deceived. If now they could get away this easy then it would send the message, that I can be… Read more »
The options for the government to intervene are limited by both high potential costs — financial and political, bailing out either or both irresponsible lenders and irresponsible borrowers — and legal limits both within Hungary and the EU. For the banks, facing the certainty of massive defaults on thes loans, it is a clear-cut accounting problem: at what point does the advantage of writing down or off non-performing loans become less than the disadvantage of holding those loans? A government intervention in the form of limiting write-offs for foreign currency loans might be a possibility to encourage banks to offer refinancing in Forint loans. Direct subsidies of either the banks or the borrowers would be incredibly costly and legally questionable, not least in fairness grounds to those who did not issue or take such credit risks. On the other hand, borrowers have got to start weighing their options. Does anyone reading this blog know what the legal and financial consequences are in Hungary for walking away from properties and defaulting on their loans? Is there a bankrupcy-like procedure? If so, what are the conditions and penalties, short and long term for declaring bankruptcy? Or is there no possibility in Hungarian… Read more »
Eva S. Balogh

Jano: “I agree that the banks have been behaving disgustingly about this and that they lured naive people to get indebted in foreign currencies.”
I don’t think that much “luring” was necessary. The difference in interest rates was so huge that only fools would have taken out loans in forint. It is another matter that the borrowers didn’t anticipate such huge changes in the exchange rates.

From 2002 through the first third of 2008, there was no great currency risk for those taking out CHF loans as the exchange rate displayed considerable long-term stability around 160 HUF/CHF (for which the government has not been given enough credit.) For this period, given the banks high interest rate demands on HUF loans, the foreign currency risk appeared manageable to many, but a rational analysis would have shown that the difference in interest rates said a lot about the expectations for the HUF/CHF rate. In other words, the rates available for either HUF or CHF had the long-term currency risk built into them. The (International) crisis years 2008-2009 were a period of turbulence to the strong disadvantage of borrowers, but managed to stabilize in the Bajnai era at around 180, a high number, but one which would have been manageable if allowed to stabilize, or if the loans had been refinanced en masse at that moment in HUF. (But even then, the HUF loans would have had to have had higher interest rates to account for inflationary expectations.) Since the beginning of the Orban II government there has been a steady increase in the CHF value to a peak… Read more »
Odin's lost eye

GM somewhere I read that in Hungary there is no form of ‘personal bankruptcy’.
When the previous government went to the IMF they neglected to take into account the additional personal debts. If someone had been a little smarter they could have negotiated with the Swiss bankers and converted the loans into Forints. Probably at a discount as the bankers at that time were very short on liquid assets. The Hungarians could have bought the principle on the defaulting debts for a song and the rest of the loan principal at a discount. The Hungarian government could have become the mortgage holders.

I think HUngarians in general are not fairly educated about monetary matters. I do not think a regular HUngarian has any clue about the relationship between interest rates, foreign exchange, short and long term economical outlook. Western countries have a long history of “private bank” money borrowing. Hungary on the other hand did not have such system until the last twenty years also. WHen housing was deprivatized, homes were sold for way below their respective value, and if any “loan” was required at the time it was not under a regular mortgage. THe mortgage concept came in with the new banks, new constructions, wit the birth of the real estate industry. Most Hungarians had no concept whatsoever, and no government made it their priority to make sure people will be educated. THe banks had no interest in educating, and often the clergies themselves lacked the understanding. When you look at the current government, even them have no idea of the basic concept of what affects the raise and fall of the Hungarian Forint. When you read the article above (or do your own research on what happens to the Forint when a Fidesz member opens his/her mouth), you cannot blame… Read more »
Odin's lost eye

Some 1 – yes you are correct. Until the EU insisted that the ‘Mutual’s’ should be allowed to become ordinary banks their lending roles were strictly limited to loans secured on real estate. Many of the Mutual’s were started (mainly by the skilled and trades people) in the early 1800s. As Mutual’s they could not trade in the financial markets and until the so called Mortgage famine of the 1970s they could not borrow money from elsewhere. Equally Mutual’s could not sell on their debts.
The U.K. has long borrowed money on real estate and youngsters (in my day) were taught about the system and the consequences of non-payment etc
Oh what is a ‘Mutual’? A ‘Mutual’ is a society/company where all who deposit money with it have shares in the company and the right to speak up about how it is run. Each ‘depositor’ had votes in proportion to the amount of money they had in their ‘Share Book’.
I will also agree with you Hungarians are in the main I won’t call them ignorant rather un-knowledged about money.

Your wages are in forints and your loan is in francs. If the franc becomes expensive, you are screwed. The banks explained this. This is similar to the problems here in the US when the loan requirements got so relaxed before the crisis that a non-English speaking semi-illegal household aide got loans to buy two townhouses in NY. You could get a mortgage without social security number, with assets like my “brothers motorcycle”. Lot’s of people took adjustable-rate mortgages, when you have a ridiculously low introductory rate, say for 5 years then the “real” adjusted rate kicks in. So when the 5 years was up and the tsunami of foreclosures started the rhetoric was the same. “Evil banks didn’t explain”. Now the tsunami is over, I believe most of the people just foreclosed on the homes (I know freinds personally) and life goes on. To soften the impact the government started all kinds of programs to help home owners, but all were crafted in a way that there’s no free lunch (we pay the half of your soup). I believe some very high percent of the helped homeowners were delinquent again in a few months. That’s why it’s better be… Read more »

Odin’s lost eye, Mutt Damon, Some1. You are all right about there is no personal bankruptcy, people should pay attention to the risks involved, the collateral, and the government should have intervened a long time ago.
But mortgages were introduced in Hungary under the Horn government, but the 1998-2002 Orban government promised under certain conditions that young people with children or planning to have children should have a home and therefore, they could get subsidy on the interest due.
Many people applied for this, although I am not certain if this regime also applied for foreign currency loans.
Medgessy reduced this subsidy in 2004, and from that moment, the foreign currency loans took off. No government or even parliament did anything to stop this or even warned the people.
Orban could solved this problem, but opted for the purchase of MOL instead.
Currently, banks cannot write off these loans, as it requires a court decision to write off (for tax and legal purposes), but the courts will not do this as it is not included in the current legislation.
Hopefully, the bankruptcy law will include the aforementioned, but if not then the people will keep this debt till the moment they die.


Ron, If you read my post, very much what I am saying is that the whole mortgage system was introduced in the last twenty years also without any education on western financial concepts. I agree with you about that we cannot solely blame those who took the opportunity. THey were not aware that they were gambling, as it seemed that Hungary coming out under the communism will only make things better. On a personal level many people had to pay the price for such transition. Even now there are no plans to educate about finances. I think in Hungary it would be more important to bring in Economy 101, then a third language, but that is just me.

peter litvanyi

No personal bankruptcy in Hungary? Oh I learned a lot from these comments. Thanks everyone. I also must point out that the exchange rate…well…I am again recommending Naomi Klein’s book “The Shock Doctrine” to everyone here. There is a lot of money /transfer of wealth/ “changing hands” here. More exactly say it: taken away from those evicted. That’s when you ask: “and who benefits”? No?
Peter Litvanyi

Odin's lost eye
One of the problems with some of these loans is that they are only partially secured against real estate. The value of this real estate however is falling. The problem is that I do not know how the Hungarian Banks handled these Forex loans. If the Hungarian banks borrowed the money and then lent it to the third parties then they (the Banks) are to put it mildly ‘stuffed’. If the banks acted as agents for the Forex Lenders then they (the Banks) may have some wiggle room it depends on their agency agreement. If the banks in Hungary just introduced their clients to the lenders (for a fee) then they (the banks) are off the hook! I cannot understand why a bad debt cannot be written off in Hungary. This shows a total lack of understanding of common accounting principles. When a debt is ‘written off’ it does not mean that the debtor is off the hook. All a write off does is to transfer the debt from a one ledger to reserves which are reduced, but the debtor still owes. There also seems to be another problem. When a person dies their heirs seem to inherit the debts.… Read more »

GW: From 2002 through the first third of 2008, there was no great currency risk for those taking out CHF loans as the exchange rate displayed considerable long-term stability around 160 HUF/CHF (for which the government has not been given enough credit.)
Not enough credit? But was the stable-(=expensive)-forint policy not one of the major mistakes of successive Hungarian governments? Along with the excessive catering for short term interests (goodies for the electorate)?
It seems that banks, government and lenders share responsibility for the fiasco. So these three parties should try to find an acceptable solution. Which is, I am afraid, not in line with Hungarian traditions. Anyway, are the lenders organized?
The Fidesz proposal – bailing out the rich – must be about the worst possible line of action.