Financial meltdown–Gulyás style by György Lázár

Last year I wrote that Viktor Orbán’s economic high-wire act just might work. Well, it seems it hasn’t. The financial markets are about to give up on him, and the forint is starting to head south.

When you mix populist rhetoric with financial incompetence you get a truly potent recipe for a financial meltdown. And that is exactly where Hungary is at this very moment.

Even Orbán’s confident finance minister, György Matolcsy, thinks that a downgrade is inevitable.

Orbán rolled in with bombastic promises of one million jobs and a chicken in every pot. He soon realized that the debt is Hungary’s main headache. Significant portions of the state debt, the municipal debt, the corporate debt and of course the consumer debt are Swiss franc denominated. His government has astutely noticed that the most dangerous of these is the mortgage debt.

As a man of action, Orbán immediately started to fix the problems and made two terrible mistakes. Government meddling with the economy is always dangerous. The Nobel-prize winning economist Milton Friedman, another Hungarian, wrote that “the government solution to a problem is usually as bad as the problem.”

The first mistake Viktor Orbán made was how he implemented his foreign denominated mortgage ban. The Swiss franc ban made some sense, but the euro denominated mortgage ban didn’t. If I correctly recall, even Sándor Csányi, the quiet OTP oligarch, was in disbelief. The drastic foreign denominated mortgage ban reduced originations, real estate turnover dropped, and new construction disappeared. It literally choked the market and started a deflationary spiral. Real estate prices continued to drop.

The second mistake was just as deadly. The unusually long (more than one year) foreclosure moratorium produced a poisonous side effect resulting in 200,000 defunct mortgages. Orbán theatrically pronounced that no Hungarian can end up homeless in the streets because of “greedy banks.” Hungarians got the message; they stopped paying their mortgages.

Bank books are loaded with Non Performing Loans (NPLs), and when you have 200,000 of them in a tiny country like Hungary, the banks are really in big trouble. If banks foreclose on the mortgages, what do they do with the real estate? Whom do they sell it to? If they let the defaulted real estate hit the market, it will create a huge deflationary shock, driving NPLs even higher.

And herein lies the problem. Some of Hungary’s banks have eurozone parents who will pick up the tab, pulling their subsidiaries out from the rubble. They may increase capital to the regulatory limit, but they won’t lend. This will badly hurt the economy in the future.

More than a quarter of the Hungarian banking market is owned by OTP, a "Hungarian owned" bank, that has no foreign partner. OTP expanded into dead-end banking ventures from the Ukraine to Bulgaria, and all of her subsidiaries are doing badly. The big puzzle is how bad is OTP’s balance sheet? I wouldn’t trust the published numbers. There is a time lag in reporting that distorts them. I also suspect that OTP is in much worse shape than reported. I’m especially suspicious of their municipal loan portfolio. They expected NPLs to top out at 15%; under 20% they are still OK, but above 20% OTP will need cash or must be nationalized. (This is the point when we might have a Hungarian Anglo-Irish Bank case.)

Viktor Orbán recognizes that OTP is in a tough spot. He has stated that the government is firmly behind the bank. Now the question is where will he get the money? A partial takeover of OTP will include a piece of MOL because of the cross-ownership structure, and MOL is already partially nationalized. Orbán’s direction is clear; he is envisioning more and more state ownership.

The government is also talking about beefing up the state owned bank system to help borrowers. Great idea! But where will the money come from? They were also talking about buying out the expensive PPP financing solutions and providing public employment for 300,000 low skilled workers. Where do they plan to get the money for all these ideas?

Orbán knows that he’ll need to execute drastic budget cuts next year, and that could lead to social explosion. The demonstrations have already started, although they are not yet as vicious as in Athens.

The real danger is that the inexperienced young Hungarian leadership will start to panic and experiment with irrational financial solutions. Orbán’s past Chavez-style tirades against the IMF were not helpful; and his pronouncement that the West is dead, or at least on the verge of collapse, doesn't increase his credibility. He calls the communist Chinese leadership Hungary’s allies and sees a “beautiful future” with Saudi Arabia. His apparent delusion or desperation is not a good sign. 

The government senses danger, but they still fail to address the fact that Hungary is close to a financial meltdown with its runaway inflation, bank runs and even higher unemployment. To paraphrase Bette Davis from “All About Eve” – Fasten your seat belts, it's going to be a bumpy year! I wouldn’t be surprised if Viktor Orbán’s government doesn’t survive it.

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Joseph Simon
Guest

Much as one may be fascinated by Eva’s Epistles, the US political scene somehow steals the show. We have Bible throwing presidential candidates;the Texan Governor brandishing a gun, and now suggesting he would support an Israeli attack on Iran. Wow, now that should take your breath away. And of course the sexual molestation charges against Cain. And I havenot mentioned the various ‘Occupy Wall Street’ movements. Can Spectrum offer anything as exciting?

Ron
Guest

Here is an interesting article on the Vienna Initiative 2008, and why there need to be a second one.
http://www.nytimes.com/2011/11/03/business/global/euro-crisis-threatens-banking-system.html?pagewanted=2&_r=1

Paul Hellyer
Guest

I don’t think the Hungarian government “meddling” in the economy is the problem per se. Government intervention, or management if you like, in economics is essential to good governance and the overall wellbeing of its citizens. There is a strong case to be made that the current economic difficulties in the US are a result of a lack of government “meddling” (I prefer the term regulation in this context). Moreover the current crisis in Europe can only be solved by government intervention.
The issue in Hungary is, of course, the nature of the government’s intervention rather than the fact that it is actively seeking to solve real problems – many of which, but not all, I agree, are of its own making.

Rigo Jancsi
Guest

Joseph, you missed the topic again. No surprise, though.

Ron
Guest

Paul Hellyer: There is a strong case to be made that the current economic difficulties in the US are a result of a lack of government “meddling”.
Please find here the pdf file (639 pages) on the Wall street Crisis prepared by the Permanent Subcommittee on Investigations of the US Senate.
http://www.geenstijl.nl/archives/images/PSI_WallStreetCrisis_041311.pdf
But actually I think the the SEC was sleeping, and another issue is why we do not hear about mistakes made by auditors. Unless audits never took place.

Ron
Guest

According to Napi Gazdasag a new law is accepted, which introduce quicker bankruptcy and personal liabilities for shareholders. Although google translate makes it a little bizar. I understand that liabilities exceeding the capital with 200% (factor 2) will be falling under this regime. Well this is the end of Hungary. Now nobody wants to invest.
http://www.napi.hu/magyar_vallalatok/bedolt_cegek_elkepeszto_tartozasok_igy_avatkozna_be_a_kormany_.498909.html

Member

Joseph Simon, you posted your problem wit the USA on the wrong blog. THis blog is about Hungary , and the Hungarian problems. I suggest that you have one browser window and only one tab open at all time. THat will help you focus. You know, you do not put television set in the same room and watch two television program at once because you would mix up the events. Good luck.

Ron
Guest

Eva: The real danger is that the inexperienced young Hungarian leadership will start to panic and experiment with irrational financial solutions.
I disagree the real danger is incompetent, arrogant and jealous Hungarian leadership, which experiment with irrational and lack of basis financial solutions and mock and insult foreign investors and banks.
Oh wait we already have this.

JoLenneEgyUjKezdet
Guest

It is so difficult to deal with evil leaders.
The Orbans are evil before incompetent.
The neighboring Czechs have cleaned up the country, and eliminated the influence of the previous soviet-socialist class.
Hungary adopted the members of that class into the new parties, equally distributed.
This is the core problem. Many people in power must hide their past, and compensate for it with anti-communist rhetoric.

Odin's lost eye
Guest

The point at issue is Hungary’s total foreign Debt. This is the Hungarian Governments own debt (bonds), the Local authority debt and the private debt.
Long ago Ferenc Gyurcsány called in the IMF (Not the Israeli Monetary Fund Johnny Boy). At that time the government should have used the opportunity to address the country’s Total Foreign Debt (including the private foreign currency debt problem).
If the Hungarian government had had ½ grams of nouse it would have negotiated with the lenders (who were also ‘cash strapped’) to take over much of that debt and because the foreign banks were very short of cash. It could have been done by good negotiators and probably at a discount. This could have been done with the IMF support. If this total debt Hungarian debt had been considered as a whole, the IMF would probably have ‘played ball’. However the Hungarian Government only considered its own debt and left the other to sink or swim.
With the stupid financial ‘mumbo jumbo’ of the present government the opportunity is lost.

Kirsten
Guest

“The neighboring Czechs have cleaned up the country, and eliminated the influence of the previous soviet-socialist class.”
I would find more similarities than you, but of course with an orthodox communist system it is easier to find support for reducing the role of former communists in the top political ranks. I would not be so sure about the economic elite, though. You cannot clean up if you privatise the former state owned enterprises into the hands of their (former) directors. And in that the differences between the Czech Republic and Hungary appear quite small.

Kirsten
Guest

To Jo lenne: And the benefits of removing the socialist elite also depend on who they are replaced with. There is no guarantee that the new elite will be able to change the informal ways of coordination that were so prevalent already during communism. I think that this has survived to a substantial extent also within (formal) democracy. And in that, too, the post-communist countries are rather similar.

Member
The real problem with Hungary is that they cannot cut away from the past. New leaders cannot lead and take responsibility for their actions based on current social and economical situations, because each time some nasty little group comes forward that tries to stir up trouble in order to get into power. It is like in the Third World. In the name of the country they stir religious, social and nationalistic sentiments to diverge the masses from the real challenges and the real issues. When they get in power, they are caught unprepared and unqualified. Let’s get honest, what could of put Hungary back on the right track was the new Constitution, the changing of the Religious laws, bringing Gyurcsany to justice, the allowing the Gyongyospata shame to unfold? Did we really had to spend the time and energy on these issues, why our Prime Minister offends the IMF, the USA, religious leaders, corporations and banks? If all the Jews, gypsies and homeless would leave Hungary, and Gyurcsany would be in jail, would Hungary’s problem will be solved? Our current government and other parties are playing government for the expense of Hungarians for the sole reason of securing a job… Read more »
Member

@Simon Jozsi The difference is that we, in the US, we can afford to be entertained by a few right wing-nut. In Hungary your kids will end up selling apples on the street if you don’t realize that you have to get rid of Orban and his incompetent bunch. Your call.
The mess with the delinquent mortgages is intentional. It is just part of the grand Orbanian “screw the banks” vision. Let’s try to get somebody pay for our mistakes. There is money in the banks, but these greedy bankers are sitting on it. You know, those guys from the communist era history book cartoons: big black cilinder hats, big cigars, sitting on a big sack with a dollar sign on it.
I think in not so distant future they will start printing more money … gee, isn’t money what we need? A hyperinflation every 70 years. That’s not bad, my Hungarian brothers.

Wondercat
Guest

Today’s SAN FRANCISCO CHRONICLE has chosen as a cover story — below the fold, but still — a profile of Ambassador Kounalakis. The e-version, http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2011/11/06/MN021LJUD4.DTL, is embargoed till sometime tomorrow. Points of interest include the reason that the United States has sponsored Budapest’s gay-pride parade for two years running: This is another facet of the encouragement of self-expression and diversity of opinion that has marked American relations with Hungarian governments and the Hungarian people since the days when Cardinal Mindszenty was the Embassy’s star boarder. Much of the article is personality lite; for example, several column inches are given to the haircuts of her palindromically named ten- and nine-year-old sons Noe and Eon. But that makes it an all the faster read, and perhaps these glimpses at Her Excellency will provide a perspective on some aspects of the United States’ dealings with OV and other Hungarian statesmen.

Member

The link provided by Wondercat did not work. Here is the correct address (less an ,)
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/06/MN021LJUD4.DTL

Ron
Guest

Off-topic: In 2009 the Bajnai government wanted to impose a real estate tax, which was heavily opposed by Fidesz. The rates atthat time were:
http://ingatlanmenedzser.hu/gazdasag/2009/5/12/20090512_brutalis_ingatlanado_johet
Today (actually last week) Fidesz wants to implement a real estate tax.
http://index.hu/gazdasag/magyar/2011/10/26/oriasi_teher_az_uj_ingatlanado_de_meguszhatjuk/
This tax will be a draconian tax compared to the previous government. The thing is that this tax will be imposed not by the government, but by the city councils as compensation of loosing out on money from the government.
The question will be how to value the real estate as the entire market (exception Buda)is collapsed. And this tax will not help.

Paul
Guest

What is this ‘real estate tax’?
In the UK, we have a locally collected tax based on the ‘rateable value’ of your property (not it’s actual market value, but a value determined by the local authority and periodically reassessed). This is called the Council Tax, and used to be known as the ‘Rates’ (hence the tern ‘rate payers’).
Is the proposed Hungarian tax the equivalent of this?

Paul
Guest

“…Eleni Kounalakis… heads an embassy with 400 staffers.”
400 staffers??? What on earth do they need 400 people for? Even if they take it turn to lick OV’s arse one day at a time, that still leaves 35 unemployed.
Although, at least it will only be 34 next year.

Paul
Guest

“I wouldn’t be surprised if Viktor Orbán’s government doesn’t survive it.”
Here I go again, banging my usual drum, but in what way will OV’s government not survive it?
There are only three ways the government will “not survive”: OV resigns, popular uprising, losing election.
The first two aren’t going to happen and the third can’t happen for another two years – and even then is very unlikely.
I rarely get a reply when I (frequently) make this point, so, if György Lázár is reading this, I’d appreciate his thoughts.

Ron
Guest

Paul: Is the proposed Hungarian tax the equivalent of this?
Yes I assume so, the draconian part is the percentage used. Maximum 3% of the value of the house.

Ron
Guest

It seems that some newspapers columnists, including Fidesz supporters, more and more urging VO to go back on his stance to fight the IMF and other financial institutions.
http://budapost.eu/2011/11/making-peace-with-banks/#more-871
I believe they are doing this, so that the new patsy for the new taxes to be introduced will be these institutions and not VO.

Wondercat
Guest

@Paul, “400 staffers??? What on earth do they need 400 people for?” — Spying. Economic sabotage. The slow drip of Hollywood poison into sleeping Hungary’s innocent ear. Think the worst, and proclaim it: Someone is out there who will believe it and pass it along.

Lutra lutra
Guest

@Paul, there is a fourth possibility, that some FIDESZ MPs will jump ship to form their own party. One of the problems of having a two-thirds majority is that there isn’t enough space for everyone to get their nose in the trough (especially as Orbán seems reluctant to change his cabinet), and there are some who realise that being thought of as smarter than OV spells the kiss of death for their career in his party and hence might rediscover their principles. Not sure what odds you’d get on this becoming reality in the next 12 months, though

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