Tag Archives: banking sector

The Hungarian Constitutional Court delivers a blow to the central bank

I would be remiss if I didn’t comment on last week’s news: the unanimous decision of the Constitutional Court regarding the status of the Hungarian National Bank’s recently established foundations.

I have followed and reported on the bank’s highly unusual “business activities,” which included the purchase of valuable real estate with the presumed purpose of making a profit. The best example was the purchase of Budapest’s most valuable office building, the Eiffel Palace.

But the most spectacular venture of György Matolcsy, chairman of the bank, was giving away 250 billion forints to five “educational” foundations. That is a tremendous amount of money, about 2% of Hungary’s yearly GDP. It was especially galling that the National Bank refused to divulge any financial details of these foundations. A year ago, after being rebuffed by the bank on the issue, Bertalan Tóth, an MSZP MP, brought suit against the bank. Tóth won both in the first instance and on appeal: the verdict was that these foundations must give a full account of their operations and finances because their activities are financed with public money. The case then moved up to the Kúria, which agreed with the verdicts of the lower courts.

It was at this point that Matolcsy, most likely with Viktor Orbán’s blessing, made a fatal mistake. With incredible speed a bill was presented to parliament that made the financial details of the foundations a state secret. The reason? Knowledge of the financial activities of an affiliate of the bank might cause financial loss to the National Bank itself. When pressed, Lajos Kósa, leader of the Fidesz parliamentary caucus, explained that the money that had been put into the foundations was no longer public money. It had morphed into private property.

Fidesz’s decision to push this very dubious bill through parliament was in vain. The legislation got into trouble as soon as it reached the desk of President János Áder. He and his legal team decided that the amendments attached to the Law on the National Bank (Law CXXXIX of 2013) were most likely unconstitutional and decided to send them to the Constitutional Court. In cases like this the court has only 30 days to decide. On March 31 they handed down a unanimous decision: the bank’s money didn’t morph into private funds once it was deposited in the foundations. The 250-300 billion forints are still part of the national wealth and as such must be transparent.

The case was so clear cut in my opinion that it would have been close to impossible for the judges, even if most of them are in the Fidesz camp, to give their blessing to this outrageous bill. But the court could have ruled much more narrowly than it did.

The Hungarian media’s primary concern in this case was always the lack of transparency, and therefore the reports that have appeared about the decision usually emphasize this particular aspect of the decision. They rejoice that from here on they will have access to information on these very suspicious foundations without even having to ask for it. From here on these foundations must make all their transactions public on their websites.

I, however, wonder whether some of the Constitutional Court’s observations on the “job description” of the Hungarian National Bank aren’t more important than the transparency issue. The court, among other things, states that the National Bank serves the common good and that it is not part of the private sector. Therefore it cannot pursue commercial activities intended to generate a profit. Whatever extra money accumulates in the coffers of the central bank is the result of changes in exchange rates. But this is not profit in the traditional sense of the word, as Péter Róna pointed out on ATV Friday night. Perhaps the best description of the money thus accrued would be “gain.” In Hungarian, he called it “eredmény.” If, however, a central bank tries to manipulate exchange rates for its own financial benefit, Róna continued, it would most likely be harmful to the country’s economy and would also most likely be illegal.

exchange rate

What is devastating to the present leadership of the Hungarian National Bank is that in its decision the Constitutional Court spelled out the competence of the National Bank: monetary policy and supervision of financial institutions. Its primary goal is the maintenance of price stability. Its capital comes from the state and its shares are also owned by the state. All this makes Matolcsy’s transactions in the last two or three years illegal.

The question is whether there will be any consequences of this reiteration of the mandate of the Hungarian National Bank. It took the bank a long time to chew the verdict over: it was only this afternoon that its spokesman reacted to the March 31 decision of the court. He said that the foundations, even without this court decision, were moving toward greater transparency. But, he added, “these foundations have been separated from the bank and it will be their decision how they will provide the necessary transparency.” This signals to me that the National Bank is planning to continue to play its old games as far as its foundations are concerned.

So far only LMP made public its party’s reaction to the Constitutional Court’s decision. Erzsébet Schmuck, LMP PM, today demanded “the liquidation of the foundations” and expressed the party’s opinion that in view of the Constitutional Court’s verdict the Hungarian National Bank in the past few years has been operating illegally. LMP earlier submitted a proposal which would obligate the central bank to return all gains accrued over 20% or at least 10 billion forints of the total to the central budget. Apparently this is the German practice.

I find LMP’s suggestions logical and appropriate. They most likely reflect the opinions of Péter Róna, who has been active as an economic and financial adviser to the party. It would be a good idea for the politicians of the other opposition parties to support the LMP position.

April 3, 2016

Ten Hungarian banks failed within one year

A couple of days ago George/György Lázár, a frequent contributor to Hungarian- and English-language publications, wrote a witty article in Galamus with the title “Isn’t it odd? Only Hungarian-owned banks go under.” Indeed, Lázár is correct. Since January 2014 ten banks had to be liquidated, and all ten were owned by Hungarians.

The first to bite the dust was the Körmend és Vidéke Takarékszövetkezet, which had to close its doors in January 2014. The Hungarian National Bank fined the bank’s former president and chief operating officer fifteen million forints for his irresponsible handling of the bank’s affairs. Taxpayer money was used to make the bank’s depositors and creditors whole.

A few months later, in June 2014, the largest credit union, the Orgovány és Vidéke Takarékszövetkezet, went bankrupt. Today Imre G., the credit union’s chief operating officer, and two other employees of the bank are in custody.

In August the Alba Takarékszövetkezet lost its right to operate. The bank was woefully short on capital, and the Szövetkezeti Hitelintézetek Integrációs Szervezete (SZHISZ), the supervising authority of the credit unions, found serious irregularities in the everyday running of the bank.

In November the operating license of the Széchenyi István Hitelszövetkezet was withdrawn. The bank had been losing money for years. The regulators told the bank’s managers to raise capital, which, it seems, they were unable to do.

In December the Tisza Takarékszövetkezet had to end its activities after the regulators found serious irregularities in the conduct of the management.

If you think that only Hungarian credit unions have financial problems, you are wrong. The Hungarian National Bank withdrew the operating license of the Széchenyi Kereskedelmi Bank on December 5, 2014, an event that even Bloomberg reported. The owners of the bank were István Töröcskei (51%) and the Hungarian state (49%). Töröcskei’s name cropped up earlier in the case of the Széchenyi István Hitelszövetkezet, at which time certain opposition politicians demanded that he resign his post as head of the Államadósság Kezelő Központ (ÁKK), the office that manages the country’s debt load. At that time, however, Töröcskei convinced his superiors that he had nothing to do with the demise of the credit union, of which he was “only a trustee.”

The Széchenyi Kereskedelmi Bank has a colorful history. It was established in 2008 in the Cayman Islands as SPE Bank, with two billion forints in capital. In 2010 the original owner sold the bank to István Töröcskei and Imre Boros, who changed its name to Helikon Bank and, a month later, to Széchenyi Bank. Imre Boros had worked for years in the Hungarian National Bank during the Kádár regime. After 1990 he became a member of the Magyar Demokrata Fórum (MDF), and since the first Orbán government (1998-2002) was a coalition government, he became minister without portfolio. In 2002, after revelations that he was an agent employed by the secret service of the Kádár regime, he was dismissed from the party. Nowadays, Boros is a weekly participant in a program on the extreme right-wing Echo TV, where he masquerades as an economic expert. I should add that Töröcskei is part owner of Echo TV. In the summer of 2013 the Ministry of National Economy, i.e. the Hungarian state, bought a 49% stake in the bank for three billion forints. A year and a half after the Hungarian government found the investment so enticing, the bank went belly up.

István Töröcskei was a favorite of the current government. Why? Well, it all started back when Töröcskei was part owner of Széchenyi Hitelszövetkezet. He gave a sizable loan to Viktor Orbán to start his football academy in Felcsút. Ever since, Orbán has been supportive of Töröcskei. First, he made sure that he was appointed to head ÁKK, then he allowed him to convert his credit union into a bank before the nationalization of all the credit unions. And he allowed the ministry of national economy to sink three billion forints into Töröcskei’s bank.

István Töröcskei / Source: Magyar Hírlap

István Töröcskei / Source: Magyar Hírlap

On the surface everything seemed all right. The bank was growing rapidly. In addition to the three billion forints from the Hungarian government, the Hungarian National Bank “pumped” fifty billion forints into  the Széchenyi Bank in the form of low-interest loans that the bank passed on to its favorite customers, including companies owned by Töröcskei and his business associates. HVG listed a number of such companies in an article published on December 16, 2014, but it was only today that the Hungarian National Bank announced that they have turned to the police to investigate because of the suspicion that the problem at the bank is more than inept management. It may involve criminal activity. Whether Töröcskei ends up in custody, like the chief operating officer of the bankrupt Orgovány és Vidéke Takarékszövetkezet did, we will see, although I doubt it. Töröcskei is far too close to the prime minister to suffer such a disgrace. Orbán is a loyal friend and usually takes care of his own.

The last four banks György Lázár listed are all affiliated with the Buda-Cash Group: ÉRB Észak-magyarországi Regionális Bank, DRB Dél-Dunántúli Regionális Bank, BRB Buda Regionális Bank, and  DDB Dél-Dunántúli Takarék Bank. I wrote about them on February 26.

All these bank failures cost Hungarian taxpayers billions and billions of forints. In some cases, the depositors themselves will suffer great losses because their deposits exceeded 30 million forints, the limit the bank law guarantees. During the lean years after 2008 no foreign-owned bank in Hungary was in trouble because the German, Austrian, and Italian banks kept filling the coffers of their affiliates in Hungary. In the case of Hungarian banks, this is not possible. The Hungarian government is on the hook. As we know, the Hungarian State not only bought a 49% stake in Széchenyi Bank but also purchased outright the Bavarian-owned the MKB Bank, which right after the purchase turned out to be in financial trouble. The Hungarian state had to prop up the bank to save its customer deposits.

It is one of Viktor Orbán’s manias that the majority of the banks in Hungary must be in Hungarian hands. Lázár recalls that Fidesz’s parliamentary delegation in early January called upon the government to acquire even more banks because the “foreign banks are dishonest.” Antal Rogán, head of the Fidesz caucus, accused the “Gyurcsány party” of wanting to prevent Hungarian owners from acquiring banks. “Banks in Hungarian hands offer security for Hungarian families,” Rogán claimed. Lázár points out that just the opposite is true. Prudent Hungarians would do well to avoid Hungarian-owned banks and deposit their money in the banks of the “dishonest” foreigners instead.

What’s happening at the Buda-Cash Group? No one knows

On the evening of February 22, an entire police squad arrived at the headquarters of the Buda-Cash Group, a financial institution established in 1995. Despite its unfortunate name, it is not a payday lender. Among other things, Buda-Cash (BC) owns a network of eleven brokerage firms with 200 employees and about 20,000 customers and engages in financial advising and portfolio management. It also owns four small banks that formerly functioned as credit unions and that managed to remain independent at the time other credit unions were nationalized in 2013-2014.

The following day, February 23, László Windisch, one of the deputies of György Matolcsy, head of Hungary’s central bank (Magyar Nemzeti Bank), described in dramatic terms what he considers to be the greatest financial scandal in Hungary. The National Bank suspects that over the last fifteen years the top management of BC siphoned off as much as 100 billion forints of its customers’ money.

The National Bank is new to the business of supervision. Until about a year and a half ago a separate governmental body, Pénzügyi Szervezetek Állami Felügyelete (PSZÁF), supervised the financial sector. The last time there was a thorough inspection of BC was in May 2010, when some small irregularities were discovered but nothing substantial. By that time, PSZÁF had a Fidesz-appointed chairman, Károly Szász.

From day one people who know something about the world of finance in general and Hungarian finance in particular had their doubts about some of the details of the case. First of all, it soon became evident that the Hungarian National Bank, into which PSZÁF was incorporated, has not yet done any investigation. The police were gathering documents even as Windisch’s press conference was in progress. The second fact that bothered financial experts was the size of the alleged loss, as much as 100 billion forints. The sum total of securities currently held in Hungary is only 250 billion forints. To steal almost half of this amount without anyone realizing it is hard to imagine. Moreover, there were in Windisch’s announcement several indications that the Hungarian National Bank knows very little about the whole case. He talked about a “suspicion of possible wrong doing.” And when he referred to the size of the loss, he cautiously noted that “it may even be 100 billion.” Clearly, he was groping in the dark.

Buda-cash

The following day came a new announcement. All four small banks owned by the Buda-Cash Group had to be closed. The response to this announcement was understandable panic. After all, the four banks have roughly 120,000 customers, among them about 80 municipalities which now can’t even pay their employees. Eventually, the National Bank decided to reopen some of these banks but limited withdrawals to 60,000 forints. Well, the municipalities won’t be able to do much with that amount of money.

Why were these banks closed? One theory is that the government through the Hungarian National Bank wanted to punish BC for managing to save its four credit unions from nationalization. Those holding this view are convinced that the four banks are in fact in good financial shape. They claim that in the last few months the Hungarian National Bank checked one of these banks at least six times and found everything to be in good order. Others are not so sure. They believe that the banks are in trouble and should be closed after their customers are fully compensated, as guaranteed by the bank law. And since the fund (Országos Betétbiztosítási Alap = OBA) that is supposed to make all depositors whole is financially strapped because of an earlier bank failure, the Hungarian National Bank would most likely have to come to the rescue. Therefore, according to those who dismiss the conspiracy theory, it is not in the interest of the National Bank to create a case out of thin air.

It remains unclear what’s going on with the Buda-Cash Group and its affiliates. Is the scandal real or imagined? The suspicion that it may be imagined was heightened this afternoon when Antal Rogán, head of the Fidesz parliamentary delegation, called the BC case a “socialist brokerage scandal.” Rogán claimed to know the details of the case. According to him, the owners of BC stole the money deposited in its banks by people of modest means. And BC had to be closely linked to the socialist-liberal government because, for example, Gordon Bajnai asked the chairman of BC’s board to become government commissioner in charge of the restructuring of MÁV (Hungarian State Railways). Bajnai also appointed Miklós Andrási, former manager of BC, to be the CEO of MÁV. Rogán added that Andrási was one of the founders of Fidesz, but once they discovered that he was “Bajnai’s man” the party broke all ties to him.

Fidesz is trying to make political capital out of a case we know practically nothing about. Understandably so. The top leadership of Fidesz was badly shaken by the loss the party suffered in Veszprém, a defeat that came less than two months before another by-election will be held in the same county. Moreover, there is the rapid loss in popularity of Viktor Orbán, his government, and his party. Orbán’s attack on refugees and migrants was allegedly devised to counter this trend. Some people are convinced that the idea came straight from the most important spin doctor of Fidesz, the American Arthur J. Finkelstein. Admittedly, it’s a clever move since Hungarians are not at all keen on immigrants. If the government can also show that its opponents are linked to an egregious financial scandal, so much the better.

Late this evening the Budapest Stock Exchange restored Buda-Cash’s right to continue its activities, admittedly with major restrictions. They can trade only in derivatives (currencies), not stocks, and can only close out positions they hold, not initiate new positions. This might be intended to be an orderly liquidation of the firm or simply a way to buy time for the investigation to play out. We’ll have to wait to see what the National Bank comes up with. I don’t expect any quick answers. As we know, the Orbán government is skilled in dragging things out.

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.

Nationalization Hungarian style

It is hard not to notice that the Orbán government is very fond of state ownership, especially in business sectors that they deem of “vital interest to the nation.” The first major venture of the Hungarian government was the purchase of a 21.1% share in MOL. It was a fantastic deal for the Russian company that owned these shares and a truly rotten one for the Hungarian government. As we discussed at the time, the Orbán government overpaid: 22,400 forints per share. Today the price is 16,350.

The next move was to buy out Rába Automotive Holding, whose stock is languishing on the Budapest Stock Exchange. This was followed shortly thereafter by the purchase of the German E-ON storage facilities. Again the price was too high according to people in the know.

So, one can ask,what is the Orbán government after? When we hear about the nationalization of private property, we tend to think of the kind that took place in 1948-49 when one day the store owner arrived to open up his small store only to be barred from entering. Surely, this kind of nationalization is out of the question today. If the state wants to have a greater share in the economy, it has to find more subtle ways of achieving its desired end.

Policy Agenda, an economic and political think-tank, estimates that up to date the Orbán government has spent more than three trillion Hungarian forints on purchasing or acquiring in one way or the other hitherto privately owned businesses. In most cases, at least outside of the energy sector, the state doesn’t actually want to own these companies. Rather, it wants to change the ownership structure of a particular business sector. In plain language, to take away from some in order to give to others.

Reaching hands / tmblr.com

Reaching hands / tmblr.com

One method is direct interference in the ownership of entire business sectors. The government is able by legal means to force current business owners to give up their businesses and sell them to others. The transfer in such cases is direct; the state is not an intermediary.

A good example of this type of state interference is the pharmacies. Soon after the Orbán government came into power the decision was reached that by a certain date all pharmacies must be owned by a practicing pharmacist working on the premises. Now it seems that relatively few employees want to buy their boss’s pharmacy although the government is offering loans. So for the time being the state will have to step in and assume “temporary” ownership.

Another example of direct transfer of ownership is the heavily criticized land lease program by which state-owned lands are distributed to people close to Fidesz and their relatives. By legal means the government can also achieve a transfer of ownership in the banking sector by demanding a minimum 50% Hungarian stake in all banks in the country.

A second method of ownership transfer is for the state to make a certain segment of the economy a monopoly. Cases in point: the monopolization of tobacco products or, earlier, of  slot machines. Here the state not only interferes with private property ownership but shuts down all activities connected to a market segment. The same thing happened to the so-called Elizabeth lunch vouchers, the issuance of which became a state monopoly. It’s no wonder that the European Commission objects to the practice.

A third method used by the Orbán government to achieve a change of ownership is price fixing. No one doubts that a government has the right to adjust tax laws, but when it also decides the final price of the product the owners of the enterprise might be forced to sell because of financial pressures. The much lauded mandatory lowering of utility prices is a good example of this method.

A fourth method of ownership transfer occurs when the central government takes over the responsibilities of the municipalities and consequently their business activities. This is what happened in the case of schools and hospitals. The municipalities now own the buildings and therefore are responsible for their maintenance but the activities within these buildings are supervised by the central government.

I doubt that we’ve seen the end of the state’s expansion into the domestic economy. If tobacco products could be made a monopoly why not have national liquor stores? I’m also certain that casinos are on the list. Perhaps the transfer of Margaret Island from District XIII to the City of Budapest is the first step in building a state casino on the island.

A final note on the French Suez  Environment  Co. that was part owner of Pécs’s water company. You may recall that shortly after Zsolt Páva, the new Fidesz mayor, took office in 2009 security officers in the dead of night locked out the employees of Suez and the city forcibly took over the company. The head of the company couldn’t even enter the building. Suez naturally sued. It was only a few days ago that Páva proudly announced that they settled with Suez for 7.5 billion forints instead of the 10 billion (34  million euros) originally demanded by Suez. The central government will take over part of the obligation.  Meanwhile the price of water has gone up substantially and local MSZP officials claim that investors cannot be convinced to come to Pécs. They all remember the fate of Suez. Currently unemployment in the city is 13%, well above the national average.

Who ever said that governments were great entrepreneurs?