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.
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.
Hungarian Spectrum 
(I suspect a large part of the anger that has led to support for Fidesz comes from an intergenerational conflict regarding housing that remains unresolved. Those who already owned or were able to purchase properties — usually the ones they occupied — with very low interest rate loans in the privatization of the early 90s, although not without significant problems (like maintenance of multiple-owner properties), had a significant advantage over those who needed housing in the next generation. There was a boom in new construction, but not affordable construction (in areas in which wealthier foreign tenants or purchasers competed, this was even more the case) and when this was coupled with serious liquidity issues in the HUF-denominated credit market, such that foreign currency credits became the only possibility for many would-be-owners, a crisis was inevitable. Fidesz continues to promise solutions, but has not yet delivered anything that will be satisfactory to either debtors or creditors, and the inevitable next phase will come when banks simply exit the Hungarian market, swallowing their losses, but leaving Hungary with no credit liquidity at all, A stopgap would be a government purchase of these loans or even the properties themselves from the banks, but I don’t recognize a EU-conform structure that would actually accommodate this. Russian or Chinese banks are not going to solve this problem either.. It is possible to imagine other paths this could have or even should have taken — like permitting more multiple family housing rather than single family houses with their greater costs, or perhaps a more forgiving bankruptcy regime, but that’s all past options. The resentment of young adults with families saddled with unpayable and unforgivable debts has been a gift to Fidesz, but I don’t know how much longer it can be a gift with Fidesz unable to deliver the impossible.)
What I don’t understand:
At least in the countryside there are many empty houses some of which might be brought up to modern standards with not too much money (new windows, new central heating – just as I did with my house). Why didn’t the Hungarian governments (all of them since 1989!) get people to do this – like they did in Germany e g.
I remember some numbers like 300 000 empty houses/apartments, of course some of them are without hope, but still. It’s a total waste in my eyes. Of course people want to move in to the cities. out of the villages, but from my experience in Germany that trend will reverse some day – especially people with children prefer more space and you just can’t have that in the center of town …
Sentrooppa-Santra,
Sorry to reignite the linguistic portion of the conversation, but I have been meaning to ask a Finnish linguist (or language aficionado) about something. I’ve wondered for some time whether the double-letter phenomenon in Finnish is at all similar to the long-vowel double-consonant phenomenon in Hungarian. That alone could be enough to prove the common provenance of the two languages, perhaps, were it shown to be true. I don’t know of any other language that employs this concept to such an extent.
Googly: what you are talking about is quantity opposition, that is, distinction between short and long sounds. (And, as we know, length is marked by doubling the letter in Finnish, and for vowels in Hungarian, using the acute accent.)
Sorry to disappoint you, but quantity opposition does appear in a lot of other languages, too. (Classical Latin and Greek are examples which European learned people used to know – this, by the way, made both Finnish and Hungarian learned poets of the late 19th century very proud of their language, because the metres of the classical poetry were easy to adapt for these languages.) Moreover, it is not a very ancient feature. Most mainstream Finno-Ugricists now seem to think that Proto-Uralic/Proto-Finno-Ugric did not have long vowels, and even long/double consonants are very rare in the oldest strata of the vocabulary.
And, to continue: the presence or absence of a certain sound or feature is not very strong evidence for relatedness of languages. Sounds or features of the sound system are conditioned by the structure and typological features of each language, and they are not particularly stable but can change very fast. So, unlike what laymen often think, “sounding similar” has very little to do with “being related”. Relatedness is not based on “similarity” but on systematic correspondences which can be explained as deriving from a common origin.
@some1
You got me all wrong, I am not against banks, financial services, etc. But I do despise the way banks made foreign-currency loans in Hungary. To people who were for the most part financially illiterate, and were neither aware of the risks involved by foreign-exchange fluctuations nor prepared financially and psychologically to take said risk. And this kind of foreign-currency lending is unfair, deceptive and turns out – fraudulent. And now that all the profits they reaped when the getting was good are gone lining the pockets of bank executives back at their headquarters and the Hungarian government is about to pass legislation that’s gonna hurt them back they cry foul. And I was just surprised that Éva is springing to the banks’ defense knowing that the way they did business in Hungary and other Eastern European countries, I might add, borders predatory-lending. Thousands in Hungary found themselves stuck with some of the most extreme variable-interest-rate foreign-currency denominated loans on the planet. That’s all.
I have no sympathy for banks as institutions and the Hungarian ones have been run, to all intents and purposes, as a cartel for too long,
However, customers were not forced to take out currency loans, they did so because the interest rate was a small proportion of the forint one. Only a person of utter and complete stupidity would be unaware if the existence of exchange rates and the fact that these rates move. In many cases those taking out such loans were blinded by their unthinking greed and – loads of examples of couples and even single professionals buying three, four and five bedroom houses mainly so that they could boast to their colleagues and friends.
So, yep, the banks should probably have printed on the typical Hungarian client’s forehead, in big black letters, “I have a currency loan, I am aware that exchange rates exist and may move in an unfavourable direction”. But perhaps also a few of those customers, for once in their life, should have stood back and thought and took responsibility for their own actions.
@PhatCamper I do understand where you are coming from. I do sympathize who lost money and often “forced” to sell their homes at loss (my niece being one of them). At the same time, I must say that with financial transactions comes great responsibility, and one is to read the fine print. A home is likely one of the biggest purchase one will make in their lifetime. FX loans became common for the general public only in the last while even in North America.
FX loan is kind of a gambling. I am not sure if people were not made aware how currencies tend to fluctuate. People “knew it” in fact that by not borrowing with forints they will likely pay less on the long run as the forint at the time became stronger and stronger. I believe if it would of been the otter way around they would of locked into forints. People gambled against the forint and lost. Is it heartbreaking? yes. If it would of been the other way around, and many of the Hungarian bank outlets would of had to shut down at loss, would the Hungarian government bail out the banks? I do not see an uprising against Casinos in Hungary. In fact Orban took away the livelihood of many by not allowing gambling machines, then gave the “concessions” to his friend, who is coincidentally works for him too. Now, that is something that can be controlled. That is something the government should interfere with.
The current government has a tendency to cry fool, attack and demonize everything that arrived from the “west” in order to distract from the real issues.
If people would have decent paying jobs and the value of their money would not spiral out of control, going down the drain, if the government wouldn’t spent all of the nationalized private retirement savings in three years, if the money poured into stadiums for a non-existent achievements in flagship sports, if Orban would not sign the Paks deal, if Kozgep would not be almost the only company can win any public tender, and so forth, then maybe there would be enough money to “spread” around. In reality if Orban would appoint and allow people to their job in the government who know what they are doing, and would do it without bias, and without being influenced by some great and phoney “national interest”, then the forint would gain a momentum, the forint would strengthen, more world would out, and we would not have this conversation.
Sentrooppa-Santra,
I’m not disappointed, since I’ve been interested in learning about this, and I finally get to!
I took a quick trip through Wikipedia (where “quantity opposition” doesn’t even have an entry), so I didn’t exactly get an exhaustive look at the subject, but it seems to me that no other living Eurasian languages (except West Lombardy, which probably inherited it from Latin) have these long vowels as firmly implanted in the language as Hungarian, meaning they are explicitly marked as separate from the “short” vowels, and are phonemes in their own right (not just separate letters). I don’t know of any languages that also use the double consonant in the same way, meaning it’s meant to be held longer. Of course, a lot depends on when a language was first written down, so perhaps other languages would have a separate letter for the vowels that are meant to be held longer (instead of just memorizing the pronunciation of every word), if it had first been written more recently.
It’s a huge coincidence if both Finnish and Hungarian developed this separately, I think. The other example given was Japanese, but I don’t think they have the double consonant pronunciation, and neither does West Lombardy (to my very limited knowledge). Still, I’m sure I would have heard more about this if there were anything there that linked the two languages. Pretty interesting, though!
PhatCamper, Some1, D7 democrat,
I am also not against banks, since I recognize that they perform a necessary service. However, I don’t like the way most of them operate, so it’s better if they are healthy but very well-regulated.
The banks in Hungary are exceptionally bad, in the sense that most of the large ones charge far too much for their services, which are of low quality to begin with, and their rates are ridiculously high. I don’t think that their risk justifies such high rates, so I imagine that they mostly have very high pre-tax profits. When I say “risk”, I mean from their customers, not from the government trying to force them out of business.
If I hadn’t found a reasonable bank here, which proves that it’s not necessary to charge so much, I would not bother to have an account in this country. Most banks here give you no yield on your balance unless you buy a longer-term financial product, and actually charge you to take your money out of your account (from the teller, too, not just the ATM). I spoke with a friend about this recently, and he just switched over to Sberbank (he didn’t ask me before making this mistake), which used to be Austrian-owned Volksbank. He told me that he used to get charged to both put his money in his account and take it out, as well as having to pay a regular fee, which is why he switched.The only reason he doesn’t have to pay those fees anymore is because he deposits a large enough sum every month (he is well-paid). How in the world do regular people cope with all the fees? Especially during the time that the “transaction” tax was applied to every forint taken out, before the recent change (the first 2 transactions, adding up to no more than 150 000 HUF, are now free).
Also, we have taken out two loans in recent years from Hungarian banks, and they seem to be mostly staffed by inexperienced imbeciles. We will not be taking any more loans out in this country, if we can at all avoid it. I’m quite sure that the banks intentionally mislead people about the FX loans, in order to increase business and profits. These banks seem to me to deserve the punishment they are receiving, but Hungary ends up paying the price, through lower total amounts of lending and higher rates than might otherwise be the case.
Some1,
Are FX loans now commonly offered in North America? I find that to be astounding, since there’s plenty of money available to lend and very low interest rates for most loans, at least for people with decent credit. Is it a consequence of the much lower credit ratings for people who had to endure bankruptcy during the downturn?
googly,
Nothing whatsoever I would disagree with you there, I continue to do the vast majority of my business (legally) through a UK bank.
But my main point remains; you take a foreign currency loan at lower rates… you don’t factor in the possibility that exchange rates may move to your disadvantage? The banks were giving you the deal of your life to buy a property that you didn’t really need from the goodness of their hearts? And when it goes wrong, whose fault is that?
Yes, the banks’ customers really behaved strangely – or were told that it would be alright?
A friend of ours bought an apartment with 6 million HUF – but she took out a loan for 8 million, buying a lot of stuff, a “cheap” tv, computer – actually several, because the children needed their own …
And suddenly they had to pay it all back, a monthly installment of more HUF than she earned …
So all the husband earned had to be used for food and other necessities – not what they had expected!
I think I’ll never ever understand the logic of these FX loans – if they had been offered at the usual HUF interest rate of at least 30%, everybody would have said: Are you crazy, this is usury!
PS and totally OT:
We spent this evening in our favourite bar in Germany, not watching the soccer game but watching people going a bit crazy – thousands of young people on the streets, very peaceful …
@googly: The high banking fees have a lot to do with the transaction fee (introduced by Fidesz). It was beautiful how first the gov. forced the banks to collect transaction fees, then told the “evil” banks charging transaction fees to allow 2 free withdrawals a month. The low interests on deposits have a lot to do with the National Bank’s policy of keeping interest rate low.
No, banks are not charities, and I know that many times their business practices are not ethical. But not everything is the banks’ fault.
An,
You wrote: “No, banks are not charities, and I know that many times their business practices are not ethical. But not everything is the banks’ fault.”
That’s true, but they did nothing to improve their situation here in Hungary. They are certainly not innocent victims, but they are like the Hungarian police – too many of them are corrupt jerks who would gladly take advantage of anyone they could, but I definitely am glad that they are on the job. Without them, life would be much less pleasant.
You also wrote: “The high banking fees have a lot to do with the transaction fee”
Fees have been ridiculous in Hungary for as long as I can remember, and yields have been much, much lower than the Central Bank’s prime rate for a long time, too. The telling thing is that not all banks charge all those fees (but every bank has to pass on the transaction fees). Of course, we’re fortunate that we are wealthy enough to be treated differently than most people when it comes to fees, but most banks wouldn’t even cut the fees for wealthy people. They are hugely inefficient, and most people don’t know how things are done in other countries. Of course, there is more risk here than in those other countries, but not so much as to justify this treatment. Where else do people get charged both to put their money into their own account and to take it out, while also paying a regular account maintenance fee? It’s absurd.
D7 democrat,
You wrote: “And when it goes wrong, whose fault is that?”
I lay the blame about equally on the government, the borrowers, and the banks. Yes, people should take responsibility for their actions, but there are many instances where businesses take advantage of people for profit. Caveat emptor is wise advice, but if any parties to a contract are not fully informed by the other parties, that contract can sometimes be voided. Banks should have done a better job of ensuring that people could afford these loans, and they should have explained the possibility of exchange rate risk more forcefully. Hungarians have had very little experience with capitalism, at least the ones who never lived abroad, so they can reasonably claim ignorance. It’s not like this stuff was (or is) compulsorily taught in schools (not even gymnasiums, or college prep schools).
The government should not have let banks lend so irresponsibly, but I don’t know what the laws were at the time, so I don’t know if it was a matter of poor oversight, lax enforcement, or short-sightedness, but it’s the job of governments to protect people and to ensure that the economy does not suffer such extreme shocks. Hungary’s government was not by any means alone in their irresponsibility (hence the global financial crisis), but blame is placed with them, nonetheless.
Tappanch,
I understand when you dismiss Michael Hasenstab because of his self-interest and Eva Balogh dismisses him due to his ignorance of what’s going on in Hungary.
I think I also understand the sentiment that Hungary might luck out for the time being, but bad governance and the culture it fosters, sooner or later will sink the economy.
Hasenstab made an asocial bet on Hungary’s sovereign creditworthiness being better than the market thought. He has succeeded so far, thanks, I think, to a large current account surplus, disinflation, and luckily, really cheap money in Japan and the EU.