The European Commission is not happy with Hungary’s economic performance

Yesterday the European Commission published a press release after the commission staff concluded its fifth Post-Program Surveillance mission to Hungary. After a few encouraging remarks that welcomed recent economic improvements, the authors of the memo delivered some bad news. The better economic indicators are mostly due to artificial one-off stimuli (a decrease in utility prices, the central bank’s low-interest loan program, the workfare program, and greater use of EU subsidies) and therefore one must be cautious when assessing the state of the Hungarian economy. The report also pointed out that “although the general government deficit has been kept below the 3% of GDP threshold, government debt is not yet on a firm downward path.” Furthermore, it warned that based on the Commission’s 2014 spring forecast, “the country appears at risk of breaching the requirements of the Stability and Growth Pact.” They suggested “additional fiscal consolidation efforts, in order to avoid that an inadequate pace of debt reduction could trigger the re-opening of an excessive deficit procedure in spring 2015.”

That was  not all. The mission stressed the “benefits of pursuing growth-friendly fiscal consolidation.” The mission also called for a  stable and more balanced corporate tax system, including “phasing out distortive sector-specific taxes.” They recommended an improvement of the banks’ operating environment, including a reduction in their tax burden. And finally, “the mission called for improving the business environment and emphasized the need to stabilize the regulatory framework and foster market competition, in particular by removing entry barriers in the service sector.”

All this sounds like reasonable advice. Hungarian economists who are more and more critical of Viktor Orbán’s unorthodox economic policies have been saying the same thing for a number of years, to no avail. And it is unlikely that the Orbán government will heed the European Commission’s advice, especially their call to reduce the tax burden on the banks. Viktor Orbán immediately charged the European Commission with serving the interests of banks and multinational corporations when it threatens Hungary with the excessive deficit procedure.

Banks have it hard in Hungary. Here is one example–András Hámori, a senior executive of the Russian Sberbank Europe AG, gave an interview to Reuters that was later picked up by the Moscow Times. Hámori sees good business opportunities in the Czech Republic and Slovakia as both are expanding markets where taxes on banks are contained. But not so in Hungary where the “regulatory environment posed many challenges, which warranted caution.” He continued: “So when a shareholder decides where to deploy capital he obviously has to look at the potential return, and Hungary here does not rank on top, more like the opposite side.”

In addition to exorbitant tax levies banks also have to cope with the forex-loan problem. Prior to 2008, during the tenure of Zsigmond Járai, the Fidesz appointed governor of the central bank, the interest rate on loans denominated in forints was very high; therefore most people took out loans in foreign currencies, primarily in Swiss francs and in euros. It was a great deal while it lasted, but in the last four or five years the Hungarian forint weakened considerably against both of these currencies, placing a heavy burden on the debtors.

The Hungarian government decided to ease the hardship of those people with foreign-currency loans. With the bill that was recently approved by parliament, the Hungarian government seems to put most of the burden on the banks. According to some estimates this piece of legislation will cost the Hungarian banking sector $4.85 billion. Moreover, it looks as if the banks will have to convert foreign-currency loans to loans in forints.

Over the past week or so the Hungarian forint has fallen from 305 to the euro to 312 today. This weakening stems primarily from the central bank’s cutting interest rates to what some consider “dangerous levels.” In the last two years the interest rate was lowered from 7% to 2.3%, and last week there was talk that the central bank is contemplating at least one further reduction. The forint’s decline only accelerated after the forex bill was submitted to parliament for discussion.

Soource: Politics.hu

Source: Politics.hu

The EU is raising the possibility of reinstating the excessive deficit procedure against Hungary in 2015 because of Hungary’s very high national debt, which has been growing instead of shrinking as the Orbán government promised. This growth is especially glaring if we consider that the government could have reduced the national debt by 10% if it had earmarked for that purpose all of the money it expropriated from the private pension funds of millions of Hungarians. Today there is not one red cent left from this pension money, and it’s unclear what new sources the government can tap to bring down the growing national debt.

Reducing the national debt is especially difficult because the Orbán government is a profligate spender. They are especially keen on nationalizing private businesses. Moreover, beginning this year Hungary will have to pay interest on the 10 billion dollar loan from Russia although the actual building of the reactor will not begin for years. That will add considerably to the national debt.

All in all, I am almost certain that the country’s finances are in a shambles. However, Mihály Varga excludes any possibility of any excessive deficit procedure (szó sincs túlzottdefecit-eljárásról). He admitted that “Hungary probably will have to introduce further financial consolidation in order to lower the national debt.” I will be curious to see who’s next on the hit list.

The population hears only about the economic growth Hungary has achieved in the last few months and the higher GDP than earlier anticipated; they have no clue about how fragile the Hungarian economy really is. One could counter: “Well, just think how many times in the past four years critics of the Orbán government have predicted that the whole economic edifice Viktor Orbán and his right-hand man György Matolcsy built will collapse. And look, nothing of the sort happened.” Indeed, until now they were lucky, but how long will that luck last? There will be a day of reckoning, I believe. Mind you, they might manage to keep the country afloat just long enough to make the day of reckoning a problem for their successors.

Sort by:   newest | oldest | most voted
LwiiH
Guest
I believe that the banks hedged the loans in a way that should have minimized if not wiped out any debts due to default. That said, I’m not for “punishing” the banks because that will only hurt everyone very badly. Foreclosing on underwater properties will come with huge social costs so putting a halt on that wasn’t a bad idea until it went on for too long. Unfortunately doing nothing has only prolonging the pain and that has it’s own downsides. I think Fidesz was hoping the mess would dissolve with their fairy tale economic policies but the reality is, there isn’t a great way out of this mess. Hungary cannot spend it’s way out of the problem, it’s too small that playing with interest rates only further starves it from much needed capital. All one can hope for is that the € zone quantitative easing that is expected in the coming months can result in some relief for everyone. Regardless of what anyone things of Fidesz, real people are in danger of losing their homes because they were enticed by the a huge spread in interest rates. Swiss Fr came in @ ~7% where as HUF was >30% IIRC.… Read more »
petofi
Guest

And what if economic collapse is what Viktor and his backers are after..?

tappanch
Guest

The debt of the government is at an all time high:

gross debt of the central government as of June 27:
http://akk.hu/object.e0b83907-22aa-4a2f-8b24-8393f4802b43.ivy

net debt of the general government as of March 31 (look at the chart “Maastricht debt”):

http://www.mnb.hu/Root/Dokumentumtar/ENMNB/Statisztika/mnbhu_statkozlemeny/mnbhu_allamhaztartas_es_haztartasok_pu_szamlai/SK_PSZLA_ELOZETES_2014_Q1_EN.pdf

tappanch
Guest

Here is a photo(shop) of the thickest book of all time:

“My lies in a nutshell” by Viktor Orban

comment image

tappanch
Guest

Newspeak, 1984+30:

Interview with the director of the brand new “Institute for [Hungarian] Language Strategy” under the supreme direction of the Prime Minister.

http://444.hu/2014/06/30/bencze-lorant-nyelvstratega/

Robert Kibler
Guest
tappanch
Guest

@Robert

“As of 3/31/14, Hungarian holdings represented 7.6% of Templeton Global Bond Fund’s total net assets. Holdings are subject to change.”

The interest rate cannot go much lower, so the value of my old bonds are at their peak.

If I were Mr Hasenstab, I would do the same thing: write an article praising the performance of the government while unloading their bonds.

tappanch
Guest

” Even the slogans will change. How could you have a slogan like “freedom is slavery” when the concept of freedom has been abolished? The whole climate of thought will be different. In fact there will be no thought, as we understand it now. [un]Orthodoxy means not thinking—not needing to think. [un]Orthodoxy is unconsciousness.”

Orwell

An
Guest

@LwiiH: The word is that those who took out the forex loans at low interest rates still ended up paying less overall (including the extra costs due to the changes in the exchange rates) than those who took out forint loans at high interest rates.

http://www.portfolio.hu/vallalatok/penzugy/devizahitelesek_a_forinthitel_tenyleg_jobb_lett_volna.178336.html

Another thought about the bank hedging the loans… why would they hedge the exchange rate risk when the customer was bearing the risk?

Istvan
Guest
I have been reading about the European Commission’s report and opinion on Hungary based on a technical assessment by the Directorate General Economic and Financial Affairs (DG ECFIN), using data reported by Eurostat and the site visit to Hungary, (the “dialogue visit”) for several days now. I am totally unclear from what I have read whether the Excessive Deficit Procedure (EDP) is going to be invoked next year. The Maastricht Treaty obliges Member States to comply with budgetary discipline by respecting two criteria: a deficit to GDP ratio and a debt to GDP ratio not exceeding reference values of 3% and 60% respectively, as defined in the Protocol on the EDP annexed to the Treaty. As other posters have noted Hungary has a high debt to GDP rate floating around 80 percent which exceeds the convergence criteria of 60 percent as set forth by Maastricht anyway. If EDP is declared for the deficit to GDP ratio Hungary can propose its own solutions based on established frameworks to expenditure issues and the DG ECFIN will probably have to accept what Hungary proposes. The relevant ratios are defined in the European system of accounts (ESA95) which are no simple thing either. The… Read more »
petofi
Guest

The euro in Hungary? Never. Where would money-laundering be then??

EstiGondolat
Guest

different views by different people:
some believe that hungary is a gulash dictatorship.
some see the extraordinary corruption.
some see no problems, and worship the anti-commnunist pr of former commie orban.
the future of hungary is like its past. not too pretty.
all will change when lies will stop.

Finomreggeli
Guest

DK, the party of Gyurcsany wants a to nominate Albert Pasztor as mayor of Miskolc. Why is DK supporting an avid racist? Is DK the party of racists?

http://www.dehir.hu/belfold/ciganybunozesrol-beszelo-volt-forendor-a-baloldal-miskolci-polgarmesterjeloltje/2014/07/02/

MSZP also stands by the same candidate, Pasztor, even after the press quoted what Pasztor said about the Roma:

http://index.hu/belfold/2014/07/03/az_mszp_kiall_a_ciganyozo_pasztor_mellett/

” A baj csak az, hogy a sok kis aranyos cigánygyerekből gyakran lesz durva és kegyetlen bűnelkövető.” – Pasztor Albert the nominee of MSZP-DK

“The problem is that many cute little gipsy kids grow up to be cruel and brutal criminals” – Pásztor Albert, nominee of MSZP-DK

Only the Egyutt party remained righteous, the leader of the party, Viktor Szigetvari condemned the racist Pasztor and the racist DK and MSZP for supporting him.

Szigetvari remains the only hope for decency and normality in Hungary.

LwiiH
Guest

@An The loan fund was hedged because that’s what banks do. In real terms I don’t think people have paid less. In fact the evidence in is that people can’t pay. And, the longer this goes on the more it’s going to hurt.

Karl Pfeifer
Guest

OT According to the Hungarian fraternity of heroes*: Hungarian Liberals and Homosexuals are of Jewish descent.
http://444.hu/2014/07/02/vitezi-rend-fessetek-at-mas-festmenyet-vonuljatok-azzal/

The members of this fraternity either are members of Fidesz or are sympathizers, they are masquerading in phantasy uniforms.

PhatCamper
Guest

Éva, are you serious? “Banks have it hard in Hungary.” Yeah, and they have been taking that hard “it” and giving it to the good peeps of Hunkystan from behind while they were bent over grabbing their ankles. Since when have you started shilling and shelling for Big Finance?

only a trickle
Guest

This is essentially the concept of trickle down economics. Give the banks loads of money in the form of huge tax cuts, and other goodies and hope that some of it trickles down to the poor. The more profit the banks have the better off the poor will be. Really?

This is how the Republicans think. Eva, do you really think that giving huge tax cuts to the banks, will somehow benefit the poor? Rising tide lifts all boats and all that nonsense? I never figured you for a trickle down advocate.

D7 Democrat
Guest

“The Hungarian government decided to ease the hardship of those people with foreign-currency loans.”

I was talking to a judge who has been dealing with some of the cases brought by debtors against the banks and he says that an alarming proportion of these people don’t realize that even when the regime brings in the “rescue poackage” they will still have to pay the mortgage.
Their lawyers and the regime haven’t disabused them of the notion.

As far as they are concerned, Orban has defeated the banks therefore their mortgage is now null and void, they owe nothing.
Seriously!

Member

“They might manage to keep the country afloat just long enough to make the day of reckoning a problem for their successors.”

Viktor Orban’s successor, I’m afraid, will be a rising football star named Gaspar Orban.

The Orbans and their sycophants will only leave power in the face of overwhelming force. This will not necessarily be violent, but it will be ugly.

Member

“As far as they are concerned, Orban has defeated the banks therefore their mortgage is now null and void, they owe nothing.”

D7 – I heard the same thing from an FX debtor, but I thought she was an isolated case. Amazing, but absolutely believable.

tappanch
Guest

Orban’s new minister Sesztak is in a new scandal.

He is connected to 700 (!) [fictitious] companies with Russian owners that disappeared without paying taxes.

http://index.hu/belfold/2014/07/03/egy_fillert_sem_adoztak_a_sesztak_alapitotta_eltunt_cegek/
http://index.hu/belfold/2014/06/26/megszolalt_a_miniszterium_sesztak-ugyben/

ReggelBoldog
Guest

The Gulash soap is rolling out new traumatic episodes every minute.

The government, most historians, and most ordinary citizen have been constantly cheating each other.

Hungary and the many blogs about Hungary are spinning out of control.

Would it be our task to apply breaks to the madness?

tappanch
Guest

minimum wage per hour in euros

Germany: 8.50 (from January 1, 2015),
UK: 7.96,
US: 7.25
Hungary: 1.88

http://www.bbc.com/news/business-28140594

tappanch
Guest

Correction:

federal minimum wage in the US, expressed in euros: 5.31

tappanch
Guest

France: 9.53
Germany: 8.50
UK: 7.96

US: 5.31

Hungary: 1.88

Member
PhatCamper July 3, 2014 at 5:25 am Éva, are you serious? “Banks have it hard in Hungary.” Yeah, and they have been taking that hard “it” and giving it to the good peeps of Hunkystan from behind while they were bent over grabbing their ankles. Since when have you started shilling and shelling for Big Finance? May I ask what is your concept of the banking system? It is my understanding that banks are in business to make money. In the process they extend loans to private individuals, corporations, small businesses, and to governments. THey charge an interest and/or transaction fees in order to pay for the people they employ and to expend their business. They also pay dividends to investors. THey are not a caritatives or charities or governments, all they do provide grants to many causes. Without banks, the purchase of homes, cars, start-up capitals would seize to exist. Why? Because you want to start a business when you are young, not when you are seventy, so you did not have the chance to put aside enough money to purchase what required, so you need a loan. Same with purchasing a home. That is the run-down on banks.… Read more »
Member
Tappanch: newspeak, exactly. Alongside with the rewriting of Hungarian history, the Orbán régime is also creating its own alternative Hungarian linguistics. This is also done in a “half-respectable”, “slightly silly” way. That is, not openly contradicting received wisdom such as the Finno-Ugric relatedness of Hungarian but simply shifting the focus: OK, Hungarian may be what is called Finno-Ugric and it’s also connected to numerous other languages, but that’s not so relevant, because Hungarian is something completely different from anything else. This brutal vulgar relativism always sells well – people love to hear that language, culture and worldview are “interconnected” without going into details of what that would really mean. (For instance, what about people who grow up bilingual?) And especially now that “magyar észjárás”, the allegedly specific Hungarian way of thinking, belongs to Orbán’s rhetoric favourites. What this boils down to is something like linguistic exceptionalism and isolationism. We don’t have to bother with international quality standards of linguistic (or any) research, because we are so different (meaning: better than the rest of the world) and the others wouldn’t understand us anyway. In addition to rampant vulgar relativism, this interview with Bencze also revealed something very telling about his ideas… Read more »
wpDiscuz