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.