The latest Orbán-Matolcsy scheme may lead to a Hungarian default

Perhaps there is somebody after all who can stop Viktor Orbán. Well, not all his illegal and undemocratic plans that are harmful to the country and its people, but at least some of his madcap financial schemes. Those heartless capitalists, this time in the guise of a key credit ratings agency, are weighing in once again.

Lajos Kósa, deputy chairman of Fidesz and mayor of Debrecen, may speak of the credit ratings agencies dismissively, but when they decided to downgrade Hungary’s bonds to junk status the negative consequences for Hungary’s finances were considerable. And it seems that one of the three important credit agencies (Moody’s, Standard & Poor’s, or Fitch) recently transmitted some bad news to the Hungarian government. The message apparently was that if the Orbán government refuses to repay the considerable debt that mostly Fidesz-led municipalities have piled up since 2006, it will deem Hungary to be in default. And that is a serious threat with very serious consequences: a complete breakdown of the country’s borrowing ability without which the Hungarian economy would come to a screeching halt.

Municipalities drowning in a sea of debt
Magyar Online

What prompted this threat? On October 27 Viktor Orbán announced that the Hungarian central government will come to the rescue of debt-ridden municipalities and will take over 612 billion forints of their debt load. The speech in which he announced the decision was described as “belligerent,” and the Hungarian banking community considered it a new “declaration of war.” He described banks as  institutions that engage in usurious transactions [he talked of sápszedők]. At the end of the speech he said that “those who look ahead and have some fears might not be wrong.” This mysterious sentence, it seems, referred to those bankers  who worried that their institutions would not receive the money owed by the municipalities in full. Like Greece’s private creditors in 2011, they feared they would have to take a haircut.

A week or so after the announcement reporters learned from various Fidesz sources that the Orbán government was willing to pay only a portion of the debt. Some sources came up with a 10-15% haircut; others talked about 20-25%.

As it turned out, the worst offenders were large Fidesz-led municipalities like Hódmezővásárhely under János Lázár, Debrecen where Lajos Kósa has been the mayor forever, and Budapest’s fifth district, Antal Rogán’s turf. I understand that Orbán while in opposition encouraged the Fidesz-led cities to borrow in order to prove how much more effective Fidesz was at the local level than the socialists had been previously. In the case of Hódmezővásárhely the situation became so bad that in January 2012 Lázár practically threatened the CEO of Erste Bank that either he lets his city off the hook or else. The CEO, Jelasity Radovan, wasn’t frightened and told Lázár off. But now the “barber in chief” is taking over, and the Hungarian banking community is not strong enough to resist on its own. The bankers need help, which seems to be forthcoming from the international financial community.

A few days after Orbán’s speech István Horváth, an economist, wrote an article in Portfolio about the dangers of assuming this debt and not paying the banks back in full, as all communications after the speech indicated was the plan. In this case Hungary could end up like Greece. Although it arrived at an agreement with the lending institutions, it was still considered to be “in default.” This would be the situation with Hungary as well. Clear as anything, and it’s unfathomable to me that the “experts” of the Orbán government didn’t understand the consequences of the October 27 announcement.

Today the government spokesman, András Giró-Szász, set out to calm nerves. He said something about continued negotiations with the banks and suggested that it would be a great deal better if there was no unsupported speculation about their outcome. When reporters inquired about the warning from one of the credit agencies, they didn’t receive a straightforward answer.

What kinds of options does the Hungarian government have under these circumstances? Apparently, the indebtedness on the municipal level was so horrific that the government had to assume at least part of their debts. Now that the Orbán government is stranded with the debt it can try to pay it back in full. That would be the decent thing to do, but the government itself is strapped for funds. There are other approaches the Orbán government could try. One is to get out of the deal and throw the problem back to the banks and the municipalities. Maybe on an individual basis the lending institutions and the towns could come to some kind of  an understanding. I doubt that the banks would agree to that kind of an arrangement. Another possibility is that the government will try to work out a deal with the banks to lower the interest rate on these municipal loans. Whether the banks will be willing to oblige after all they have had to endure as a result of the Orbán government’s policies I have no idea.

I’m sure that Matolcsy’s ministry and the prime minister’s office are madly looking for a solution that will appease the banks and the credit rating agencies without breaking their own piggy bank. I await their latest act of financial creativity.

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Minusio
Guest

What a thriller!

Kingfisher
Guest

What is particularly outrageous is that municipalities (including many FIdesz ones) that were governed responsibly, are not rewarded. So the profligate and irresponsible receive a get out of jail card, while those who lived within their means have inferior facilities!

Member

Kingfisher :
What is particularly outrageous is that municipalities (including many FIdesz ones) that were governed responsibly, are not rewarded. So the profligate and irresponsible receive a get out of jail card, while those who lived within their means have inferior facilities!

Yes. I read an article about how those cities that borrowed and spent properly are very unhappy wit the turn of events, as they were not able to provide all the greasy deals to construction and landscaping companies in their “districts”. THey were not able to employ as many people either as those mayors who spent like there is no tomorrow, filled up the pockets of their buddies, and laughing off their head right now, as they received this wonderful present from Fidesz (Orban, Matolcsy). Orban is buying out the voters of the lucky cities for the expense of Hungary’s future.

Gabriel
Guest

If the country is broke, to default on its debt seems to me the appropriate measure. I completely disagree with Fidesz in their undemocratic and ultra-nationalistic policies, but when someone borrows too much, there’s also someone lending too much. Lending to governments is and cannot be a one hundred percent sure investment. Nothing is. Ultimately, I’d agree much more with an Argentina or Iceland type of solution, to Hungary and to many other indebted countries.

Ms KKA
Guest

I agree with Gabriel. Can someone please explain to me the difference between the situation in Hungary re: bailing out the banks, and the situation we had here in the US where banks are currently viewed as the evil spawn of Satan?

Member

Gabriel :
If the country is broke, to default on its debt seems to me the appropriate measure. I completely disagree with Fidesz in their undemocratic and ultra-nationalistic policies, but when someone borrows too much, there’s also someone lending too much. Lending to governments is and cannot be a one hundred percent sure investment. Nothing is. Ultimately, I’d agree much more with an Argentina or Iceland type of solution, to Hungary and to many other indebted countries.

I would agree with you, except that this debt did not seem to affect Lazar for example. It is not that the captains will go down with the ship. For that matter the captains are on the sun-deck of an other ship by now. They are Hungary’s own Francesco Schettinos. This financial nightmare Fidesz brought it on itself. At the time when the bank lent the money, they were not able to predict that Mr Potato Head, I mean Matolcsy will “manage” things. The insurance of the banks were the Hungarian government, I think if Hungary or any cities wold default, the whole management should resign. I cannot see that happening, either from Lazar or from Matolcsy, and certainly not from Orban.

Sandor
Guest

I think, your expectations are misplaced.
The Orban government has no intention to negotiate, because they are invincible. (At least in their own mind.) Nor can they afford to negotiate, because this debt is an extra-budgetary item, for which they don’t have one single wooden nickel to make the payments. Again, as so many times before, they walked into their own trap, without the slightest idea of what they were doing, and now the only device available to them is throwing their weight around.
I don’t think it will work.
The banks have long lost faith in this government and will hardly agree to any discount on the debt, because they know, the government won’t honour the agreement. They will be next to throw their weight around and call those loans. If they have nothing to loose anymore, there is no reason why they shouldn’t turn to this last resort. If that should happen, the economy goes down the tube in a week. (In fact, if they only go on for a holiday for a week, they can strangle the economy and that is easy to do.)

Paul
Guest

Nice photo, Éva!

Does anyone know how much Debrecen’s debt is?

Also, what exactly does “in default” mean in the context of raising money? Does it effectively mean that no one will buy Hungarian government bonds? If so, then Orbán will have no option than to get on his knees to the IMF (or go down with the burning ship).

NewWest
Guest

I enjoyed the latest article by Balazs Kremer in the Galamus. He is a smart sociologist out of Debrecen.
Hungary in the last 20 years has accomplished to be allied with the progressive West, what started with St. Steven, and it took only one thousand years.
Now, we arrived at the promised land.
There is one problem, Orban missed this historical event, and wants to toss Hungary back in the Turkish/Russian alliance.

LwiiH
Guest

Gabriel :
If the country is broke, to default on its debt seems to me the appropriate measure. I completely disagree with Fidesz in their undemocratic and ultra-nationalistic policies, but when someone borrows too much, there’s also someone lending too much. Lending to governments is and cannot be a one hundred percent sure investment. Nothing is.

You are completely correct… that said, the warning from the rating agency is quite appropriate.

As soon as I heard the scheme my first thought was, no, they can’t be willing to go after the banks yet again. The mortgage situation was one thing. The government *had* to step in or it would have been a social disaster. In this case the situation is quite different and it should be individual cities that declare bankruptcy, which should allow for debt restructuring. Insolvency.. that’s a bigger problem.

Guest
London Calling! János Lázár he of the ex-mayoralty of Hódmezővásárhely has shown – as you sow, so shall you reap. After his gambling sprees as mayor – he left a debt – still growing – of 30billion Fts before Orban bailed him out. Eva said in a previous blog that each inhabitant owes 450,000Ft (£1300). As Mr Nasty, he blackmailed all government employees who had a bank account with Erste Bank to close them, and many did. I am sure his bank-bashing has found favour with Orban and Matolcsy and they are all out-doing each other to match Jobbik’s anti-bank rhetoric. The foreign owned banks have had to tread a very careful path – they are desperate to leave Hungary, but have to protect their current investments. Orban et al have the banks by the short and curlies (I have no doubt that’s what Orban’s veiled-threats meant) – to the extent that they are begging the EU to go easy on Orban (“we don’t want any more Orban-nasties please!”). So yes – the rating agencies are just reflecting the reality. One of the fascinating aspects of Hungarian finances is the way the whole country has undertaken ruinous currency gambling. From… Read more »
Guest

Charlie, you’re so right …

I’m probably repeating myself with a little story, but …

My wife just got an offer (as a good bank customer …) for a loan of 500 000 HUF, repayable in easy rates of about 15 000 per month.

Well, the number of rates: 72 which means 6 years – and she’d pay back more than a million!

Of course they have to tell you the rate of interest: around 30 % – in Germany that would be usury, I’m sure.

Can you imagine people accepting this “special offer” ? Maybe you buy a used car (or a computer and a nice large screen tv), which might break down after three or four years, but the loan is still running …

Is that the way Hungarians think and act ? Unbelievable!

Guest

London Calling!

We do have those high rates (and even higher!) in England, Wolfi but you’d be barmy to take a loan at those rates.

It seems the poorer you are the fewer choices you have.

Some high-street ‘shops’ are ‘pay-day’ loan sharks – for people who want to spend their wages in advance and these ‘short-term’ loans work out at hundreds of percent – and even thousand plus per cent interest.

They are never short-term. The sharks persuade their clients to roll them over, so they become long-term.

They are then caught in the debt-net which some have been in for years.

But you still have to take responsibility for your financial decisions.

Regards

Charlie

Member

Ms KKA :
I agree with Gabriel. Can someone please explain to me the difference between the situation in Hungary re: bailing out the banks, and the situation we had here in the US where banks are currently viewed as the evil spawn of Satan?

The difference is that when municipalities borrow, you expect that their leader is more educated about the risks than the general population. THis is why people elect, and not not pull out names from a hat. The banks also assume that there are no schmucks who are running the cities, let alone a country. Yes, maybe the banks should of been smarter than Hungarians were in general. So, you are saying that because the Hungarian public elected these gambling, unqualified tags (non of them are poor by the way), the banks should suck it up, so the Hungarian “management” can go on further to abuse the system? Maybe we should open up the jails too for thieves and for scam artists, as it takes two to tango, one who commits the crime and the other who did not take precautions.

Member
Gabriel : when someone borrows too much, there’s also someone lending too much. Lending to governments is and cannot be a one hundred percent sure investment. Nothing is. Ultimately, I’d agree much more with an Argentina or Iceland type of solution, to Hungary and to many other indebted countries. If you refer to the Argentinian economic crisis in 2000 I think your are very-very wrong. A default would push the country off the cliff. Extreme poverty, 25% unemployment, riots. Hungary is not Argentina. We don’t have resources. We will not bounce back like them. Also Hungary’s 80% ish debt is far from the end of the world. An intentional default would be suicide. I’m not sure if I understand the borrow too much – lend too much thing. You mean the lender is at fault to a certain degree when I decide not to work and have no money to pay back the loan? Again Hungary’s 80% debt is the same as the EU average. If they can pay it back we can do it too. Just not with Orban and Matolcsy. By the way Germany is more “indebted” than us. Should they default too? I guess not. Somebody should… Read more »
Minusio
Guest

“Just not with Orban and Matolcsy.” Exactly. For Hungary that is the real problem – and it won’t go away in the foreseeable future. And when this future has became history, most qualified people may have left Hungary. Outlook: bleak.

As you compared sovereign debt in Germany and Hungary: The reason why it’s not the same is the fact that 2500 German SMEs are world market leaders in their fields (sometimes tiny niches) according to generally recognised definitions.

Germany’s economic strengt relies on those SMEs, not on VW and BMW, etc. Orbán said that he wanted to support Hungarian SMEs. But success stories seem to be rare.

Kirsten
Guest
Mutt: ” A default would push the country off the cliff. Extreme poverty, 25% unemployment, riots.” Except for the riots (Hungarians have so far a very decent record of civilised “protesting” in both the peace marches and the opposition meetings), I wonder whether this outcome is not very likely with Fidesz style policies anyway. I understand Gabriel’s position. Hungary has made (in my impression) quite a mistake already in 1990, not to renegotiate its debt. Poland did it, its foreign debt was reduced, and it is not considered a particularly dangerous country to invest today. Financial markets claim to have memory when renegotiations become inevitable, threatening the debtors never to invest again, but in my impression they can return quite quickly if the business looks “good enough”. So renegotiating as such appears to be quite useful, but to imply some lasting improvement, policies afterwards should be able to generate growth, as Mr. Bokros says, and create some stability for investment. With Fidesz, this is unlikely, with and without renegotiation. And as regards the “battered banks” in Hungary, it is easily comprehensible that they are also victims of Fidesz style unorthodox policies. No doubt, these banks will be unwilling or even… Read more »
Minusio
Guest

@ Kirsten: How very true.

Ad riots: Only those will drive Orbán out of office, eventually.

Kirsten
Guest

I forgot, the name of the CEO of Erste Bank is Radovan Jelašić.

petofi
Guest
Some1 : Ms KKA : I agree with Gabriel. Can someone please explain to me the difference between the situation in Hungary re: bailing out the banks, and the situation we had here in the US where banks are currently viewed as the evil spawn of Satan? The difference is that when municipalities borrow, you expect that their leader is more educated about the risks than the general population. THis is why people elect, and not not pull out names from a hat. The banks also assume that there are no schmucks who are running the cities, let alone a country. Yes, maybe the banks should of been smarter than Hungarians were in general. So, you are saying that because the Hungarian public elected these gambling, unqualified tags (non of them are poor by the way), the banks should suck it up, so the Hungarian “management” can go on further to abuse the system? Maybe we should open up the jails too for thieves and for scam artists, as it takes two to tango, one who commits the crime and the other who did not take precautions. Allow me to interject a little behind-the-scenes reality: most foreign banks have been… Read more »
Ms KKA
Guest

Like the man said, “You can’t cheat an honest man”…or bank, it seems. Are most of the banks in Hungary foreign banks?

Econ
Guest
It shoud be noted that the law on municipalities expressly contains the provision that the state does not guarantee the debt of the municiapalities. Banks, investors lent to municipalities knowing this express disclaimer. Obvioulsy everyone tried to convince each other about the existence of an implicit guarantee. Well, we’ll see. Having said that, I strongly oppose any comparison of Hungary to Argentine or Iceland. Prof. Szelényi also seemed to prefer to look to these examples as inspiration (it may not be fair to mention, but it is rather easy to recommend default from the US when conseqences would be born only in HUngary). However, one only has to look at these countries only seperficially to immediately realize that those examples are completely inapplicable to Hungary. Iceland has a homogenous and educated population of 300k, that is about two Budapest disctricts, it has natural resources and a special geographical location and an image of Northern pragmatism and reliability (even with a default). Argentine is 20 times bigger than Hungary with abundant natural resources (including land usable for agricultural commodities which are in demand given the increasing world population, which was the only reason Argentina could survive the default). I will not… Read more »
Guest

London Calling!

Kirsten – a country can’ just ‘choose’ to ‘re-negotiate’ its debt!

Re-negotiations can only work when the banks think that they are going to lose ALL their investment.

Better to take a ‘haircut’ on their bonds (and for Greece the banks had to take 50%) – or lose the lot.

These negotiations can only take place in a fairly desperate financial environment – and Hungary is not quite in one yet.

As Mutt says Hungary’s 82% (depends on the strength of the fluctuating Ft) is not so bad – (UK – 87%; USA – 105%; Germany – 82%; Greece – 165%; Argentina – 43%).

As Orban attempts to raise funds (Bonds)- to ‘pay off’ municipal loans at a lower rate the market will move against the Ft.

As sentiment grows – that Hungary will ‘default’ – the Ft will tumble…and tumble….and tumble.

Regards

Charlie

Guest

Kirsten A country CAN’T just ‘choose’ to ‘re-negotiate’ its debt!……

Member
Econ : It shoud be noted that the law on municipalities expressly contains the provision that the state does not guarantee the debt of the municiapalities. Banks, investors lent to municipalities knowing this express disclaimer. Obvioulsy everyone tried to convince each other about the existence of an implicit guarantee. Well, we’ll see. I am really not familiar with the contracts, but if Hodmezovasarhely and the likes that stretched to far with borrowed money needs to fail, then be it. It is not the banks’ and not the Hungarin people problem that they overspent. I do not understand why the general Hungarian taxpayer have to bail out Lazar’s town from it. I do not see Lazar is knocking on my niece’s door to pay out her mortgage, even though that her payments more then doubled since she took out the mortgage. So, what is she going to do? Sell her property and pay back the bank. If Lazar will be bailed out, I think my niece should be bailed out too. If my niece have to take a loss, well then the others should too, and it should be not my niece who bails Hodmezovasarhely out, while she is also paying… Read more »
Kirsten
Guest
Charlie, it can simply stop servicing the debt. As any other too. How do you want to prevent that? Renegotiation can be the only way how to recover part of the investment. That it is not “easy” to start such negotiations, I do not doubt. As to the ratios of debt to GDP. The ratio as such may even be lower in Hungary than in Germany and yet it may be “too much”. The interest on the debt is higher in Hungary than for Germany or the US, this already means quite a burden for the budget. (You need a higher primary surplus in Hungary to have a balanced budget overall, ie including debt servicing.) Hungary has had to squeeze the country to comply with EU rules, including all unorthodox measures, and with Orban’s policies it is unlikely that next year and the year after that the same problems can be avoided. The tax system has to make it possible to collect the needed amount of revenue. So, the problem with this size of the debt GIVEN the current Hungarian economic policy (I still think that more sensible policies could be easily introduced even by people from Fidesz but this… Read more »
Guest
London Calling! It is a myth to think that you can only pay down debt by stimulating growth. It is not. If you have growth – then of course it makes it easier – almost ‘invisible’. Magic – painless – debt reduction. However the world is in such a pickle that everyone is trying to chase the growth dragon. If the EU don’t spend because of austerity measures – then Hungary can’t sell. We can’t all consume forever. So growth will be either tiny in the present climate – or non-existent (as Hungary is finding out). Not just in Hungary – EVERYWHERE. I think Matolcsy used the phrase ‘negative growth’ – a euphemism for GDP contraction. The opposite of growth of course. The man is a fool. You can continue to spend – using the credit card – or take the pain – and pay off the debt. Hungary has to stop spending – and pay down the debt in a ‘negative growth’ climate (OK Matolcsy?). What else? Increase the country’s ‘disposable income’ – by introducing austerity measures. Or declare bankruptcy – the dreaded ‘default’. Argentina did it – Iceland too – and very nearly – California. Hungary has yet… Read more »
Guest

London Calling!

Kirsten If a country just unilaterally ‘stops servicing the debt’ – it is in immediate default.

The world falls in.

Regards

Charlie

Kirsten
Guest

Either you speak of politicians who know that and do everything sensible to prevent a calamity, in which case it is unlikely that you speak of Hungary as of today, or you believe that the group around Viktor Orban is open for rational arguments. I am not sure whether such assumption still makes sense. I doubt they find your logic compelling. This group of people will not have to worry about their living standard even after the “world has fallen in”.

But very generally, I think you know that defaults of countries have occurred from time to time and that countries can survive that. That this is very hard for the majority of the population, I have not questioned. But it cannot be proved that such a development is less hard than that with the repayment of every single penny. Hungary wanted to be this sincere in 1990 and was commended for that, and in the end, it turned out debilitating already in the 1990s.

Guest

London Calling!

And here, Kirsten I agree!

Even now Orban is saying to György – “Lord make me chaste – but not yet”!

I’m sure he has said: “If the unorthodox measures don’t work – we can always default!”

“BUT ONLY AFTER THE NEXT ELECTION, MATEY!”

Otherwise the electorate will throw them out prematurely.

Regards

Charlie

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