In order to understand how the Hungarian National Bank managed to make so much money in the last few years we have to go back to the period between 2010 and 2014 when the Swiss franc rose inexorably against the Hungarian forint and when millions of Hungarians who took out loans, mostly in Swiss francs, found themselves in an impossible financial situation. Many of them were simply unable to pay their mortgages, or even auto loans. The Orbán government naturally blamed the earlier governments for allowing “the Hungarian people” to become indebted in foreign currencies and put forth a plan to convert foreign currency loans into Hungarian forints. There was a lot of talk but no action until almost four years later, when on November 7, 2014 D-Day was announced. All foreign-currency loans were to be converted into forints.
Great was the surprise when borrowers found out that, although they had been diligently paying on their loans over the last five-six years, they now owed as much as or more than they did before they paid a penny on their loans. If, for example, someone took out a loan for 50,000 Swiss francs (9 million forints) in 2007 and had been paying mostly interest and very little on the principal, he now owed 13 million forints because of the weakening forint in the intervening years.
The banks also lost money on the deal because they were obliged to reduce the borrower’s debt by 1 or 2 million forints. Even so, the borrower got the short end of the stick as a result of the conversion.
The later the compulsory exchange of debt occurred the more expensive these loans would become. In November 2011 the exchange rate was 204 ft. to the Swiss franc; in November 2014 it was 256 ft to the franc. For someone with a 50,000 Swiss franc mortgage, that’s a difference of 2.6 million forints. Since György Matolcsy took over the chairmanship of the Hungarian National Bank, the Hungarian forint has continued to fall against the Swiss franc (250 forints at the beginning of his tenure versus 282 forints today).
Back in 2014, in order to exchange all the foreign currency-denominated loans to forints, the banks needed additional foreign currency themselves. So, the Hungarian National Bank lent 8-9 billion euros to the banks so they could pay their debts in Swiss francs or euros. The banks then paid the National Bank back in forints. The Hungarian National Bank profited from the difference between what it had earlier paid in forints for the euros and what it received back from the bank loans. If the government had decided to force borrowers to exchange their debts to forints in 2011, according some calculations the Hungarian National Bank would have missed the opportunity to make approximately 360 billion forints in profits on the exchange rate. The government and the National Bank were excellent market timers.
This windfall has been spent on real estate (90 billion), works of art (30 billion), a Guarneri violin, the financing of a new-fangled piano, etc. But the largest amount, 250 billion forints, went into five foundations established by the National Bank. As György Surányi, chairman of the National Bank between 1990-91 and again between 1995 and 2001, pointed out in a recent interview, this sum of money is 1% of Hungary’s GDP. It would be almost enough to pay the yearly salary of all 140,000 teachers. To put it bluntly, the Hungarian National Bank’s gain comes from the loss and sufferings of millions of foreign currency debtors.
An early critic of the November 2014 loan conversions expressed his hope that the Bank’s profit would go toward lowering the national debt, which was one of the chief promises of the Orbán government. Surányi in his interview also declared that instead of establishing “foundations” the money should be used to lower the debt and also to help the deeply indebted borrowers.
I myself wrote twice about the National Bank’s strange business activities. Matolcsy took over the chairmanship of the Bank in March 2013, and within a year it was evident that he was spending the profits of the bank at a fast clip. It was still before the forced exchange of foreign currency loans to forint loans that I wrote an article titled “The Hungarian central bank goes on a buying binge.” But that was nothing in comparison to the money subsequently put into the “foundations” established by the Bank. Since they were set up to teach “unorthodox” economics, the most respected economists of the land protested against this preposterous idea.
Others had more sinister objections: the “foundations” look like perfect places to launder money. Suspicions grew when Matolcsy refused to divulge any of the financial details of these so-called foundations. Bertalan Tóth, an MSZP MP, approached the National Bank in March 2015 for the particulars and was rebuffed. The next move was a suit against the Bank, which Tóth won in the first round. Matolcsy was adamant and the bank appealed. He lost again, and this time there was no opportunity for further appeal. Back in early March, Index optimistically predicted that “we will soon find out how good a steward of the public money the National Bank is.” Matolcsy was at the end of his ropes. He had to do something. Apparently he went to Viktor Orbán and asked him to intervene. Or at least this is what high-ranking Fidesz politicians told Ildikó Csuhaj of Népszabadság. Csuhaj learned that Ádám Balog, one of the Bank’s deputy chairmen, wrote the text of the proposed bill, which also included a hefty salary raise for György Matolcsy.
The next step was that a Fidesz MP submitted the proposal to create a law that would make the financial details of the foundations a state secret. The reason? Knowledge of the financial activities of an affiliated company of the Bank might cause financial loss to the National Bank itself. All of the Fidesz-KDNP members of parliament who were present voted for it. When pressed, Lajos Kósa, leader of the Fidesz parliamentary caucus, explained that the money that was put into the foundations was no longer public money. It had morphed into private property. Yes, exactly, and this is the problem.
According to all legal opinions, this law is unconstitutional. The hope is that President János Áder will veto it and send it to the Constitutional Court. László Kövér, who apparently disapproves of the bill, voted for it only because of party discipline and delayed putting his signature on the bill as long as he could, which was five days. Now it is Áder’s turn. We will see what his decision will be because surely Áder is not an independent actor. It all depends on what Viktor Orbán decides. Will he think that under the circumstances this bill would best be shelved or he will decide that he can do anything he wants? That no one can limit his power. Of course, there is still the Fidesz-packed Constitutional Court. Will he have its backing? That will also have to be taken into consideration before a decision is reached at the very top of the Fidesz pyramid.