Banks versus the Hungarian government

Today was the last day for the legislators to get together before the summer recess. They marked the occasion by voting for a piece of legislation that is supposed to ease the hardship of those who took out loans in foreign currencies. Nobody seems to be satisfied with the result, with the exception of Hungary’s prime minister, Viktor Orbán, who announced that “this was a historic day that may be the start of a new era…. The era of fair banks may follow.” The debtors find the assistance insufficient. The banks consider it unfair and unconstitutional. And the Hungarian currency, the forint, has been ailing as more and more details of the proposed legislation have become known.

The loss the banks in Hungary face is at least $4 billion according to the estimates of Hungary’s central bank. Today OTP, Hungary’s largest lender, said it may have to refund borrowers $644 million, most of that sum due to the charge that banks were not transparent about unilateral changes to loan terms such as interest rate hikes and a smaller amount linked to exchange-rate margins. And this may not be the end of the banks’ troubles. Antal Rogán, whip of the Fidesz caucus, indicated that later in the year the government plans to force the banks to convert their forex loans to loans denominated in forints at a below-market exchange rate. That could cost the lending institutions an additional $16 billion.

The stock price of  OTP dropped as much as 4% during the course of the day, closing down 1.7% on the day and 4.1% on the week. The share price of Austrian Erste Group Bank AG, the second biggest lender in the country, plunged 16% after it was revealed that its loss in 2014 might be as large as 1.6 billion euros ($2.2 billion) because of its poor performance in Hungary and Romania.

London-based analysts see trouble ahead.  Peter Attard Montalto, an economist at Nomura International, thinks the market “is underestimating the disruptive impact the proposed path will have on the banks in the short to medium run.”

The forex loan legislation passed with an overwhelming majority. There was only one dissenting vote and two abstentions. The former came from Gábor Fodor, the sole MP of the Hungarian Liberal Party, and the two abstentions from DK members. Fodor argues that the legislation “will cause serious economic troubles.” He is also convinced that the Supreme Court’s (Kúria) decision regarding the currency bid/ask spread and the practice of unilateral changes in contracts is unconstitutional. In addition, there is the problem of the statute of limitations, which the bill retroactively changed in a bizarre way. The clock will start counting down only after the loan has been paid in full.

Naturally, the Banking Association (Bankszövetség) is up in arms. Taking advantage of the currency spread is an internationally accepted practice which covers the real cost to the banks. Like Fodor, the secretary of the association, Levente Kovács, considers the change in the statute of limitations unacceptable. He also objects to other retroactive changes incorporated into the legislation as “they violate the rule of law and cause uncertainty among investors.” He pointed out that the banking sector is one of the largest taxpayers in the country. The banks pay 220 billion forints yearly in taxes, and that does not include the extra tax levies they had to suffer in the last three years. The extra levies themselves amount to 1 trillion forints, which translates into 2 million forints per forex debtor. He predicted serious losses and, as a result, forced consolidation in the sector.

Everybody suspects that the banks will go to court over the issue of unilateral contract changes. It is also almost certain that there will be court battles over the legality of converting foreign currency loans into forint loans at below-market rates.

Swiss franc2

All this made no impression on Fidesz legislators. Antal Rogán claimed after the vote that parliament had at last meted out justice for the debtors and promised that within a few months all unfairly collected charges would be refunded. According to Rogán, the average debt holder may receive a refund of between 600,000 and 1 million forints before the end of the year.

This promised windfall did not satisfy those foreign exchange debt holders who had earlier organized several groups to battle for their “rights.” One of these groups, Otthonvédelmi Tanács (Council of Home Defense), demonstrated in front of the parliament building this afternoon. Figuring that an average loan is 7 million forints, they now demand 5.9 million back because in their estimation that 7 million forint debt has since doubled. They claim that the bill just passed will decrease their debt by only 1.2 million, which is not enough. They charged the banks with fraud, and some of the signs demanded jail sentences for bank managers.

Those who predicted court battles did not need to wait long. OTP shortly after the passing of the bill announced its decision to sue the government. And this is just the beginning.

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16 comments

  1. The liberation of serfs was a historical legal masterpiece.
    The foreign exchange loan bail out is a legal masterpiece in failure.
    Nobody wins. Everybody loses.
    Who sent orban onto us?
    Some vengeful godess?

  2. After the selective punishment handed to RTL, I expected to see OTP and Csányi Sanyi (no, the other one) get a special exemption from the law, somehow. I guess he and Orbi Viki really are no longer buddies. Either that, or even Orbán doesn’t want to be seen favouring a big bank just because it’s Hungarian-owned.

  3. I have a theory, perhaps a crazy one, that the regime is now in a place re the currency loans where it most certainly did not want to be- it actually has to live up to its promise to foreign debt holders and *punish* the banks.

    Bear in mind that if the regime wants something changed, it is done, like, yesterday without any regard for any constitutional niceties, EU regulations or just normal rules of decency. Check out how fast the pensions were stolen, how quickly the one-arm bandit machines were effectively made illegal, how quick Lazar moved to steal the right to sell cigarettes from small family-owned shops. The decision is made at the Orban Grill party at weekend, few phone calls Sunday night and the law is passed by his brainless poodles in parliament Monday.

    However,despite numerous examples of Orban Bluster, this question has basically dragged since the Day One of the regime’s previous reign in 2010. The regime has referred the questions the courts, the Kuria and even the European Court. Normally the Orbanists couldn’t give a toss what the courts at a local or international level say. This time they did because they really wanted one of them, preferably at EU level, to come back with the answer, “No, you can’t unilaterally reverse contract obligations”. Why did the regime want that answer? Because they then could then blame the EU, the courts for the fact that they (the regime and its mafia oligarchy) are too frightened of the economic consequences of what all this will lead to.

    Now, they have no choice but to act and whatever else, we know the results aren’t going to be pretty from an economic point of view. Their business mafia will be affected directly, the normal man on the street will be, within a short time also, affected.

    Also, as I mentioned a couple of days ago, a number of those who took the foreign loans out firmly believe that with Orban’s self-proclaimed victory against the banking sector, they won’t have to pay back their loans- hard to believe but their lawyers certainly haven’t spelt out the realities to them and the regime is extremely reticent in pointing out the ugly truth (Orban is not God).

    Others, less thick, simply saw early on that the banks are very unlikely to take repossession proceedings if they don’t pay whilst the Orban War against the banks was taking place. Orban has “won”, once again they will soon realize that it was a Pyrrhic victory that they and their hero has brought them. Also, and these people I do feel genuinely sorry for, many have lost their jobs due to the regime’s economic policy and have been unable to pay back foreign currency loans. The banks by and large haven’t brought these folks to court, they will now that the loans have been converted into forints.

    So…lose-lose for everybody but especially for our Thug in Chief. Things are going to get extremely ugly in the next year or so and his lies will work for only so long.

  4. I think politically Fidesz is a strong situation with this legislation forex loans. Even OTP bank which is billed as a Hungarian bank had 55.9% of its shares owned by foreigns as of March 2014. Sándor Csányi current chairman and chief executive officer of OTP Bank Group,is considered to be the most wealthy Hungarian citizen, but he now does not control OTP.

    In July of 2013 Sandor Csanyi exercised stock options to purchase 63,364 shares in OTP which he immediately sold for an average price of HUF 4096 (USD 18) per share. Csanyi sold 2,743,000 shares in OTP bank for HUF 7.8 billion (USD 32 million), retaining just 10,000 preferred shares for himself. A number of other OTP directors sold their shares in the bank as well. It was the following week that the government announced that banks might be required to carry the full financial burden of converting FX loans to forint loans at lower rates of interest

    So politically, just like the media tax, Fidesz can play the foreign capitalist card which at least among my extended family members plays well. A year ago when Csanyi dumped his stock it was my own family members who warned me to dump the stock, which I did. Yesterday’s Wall Street Journal article by Margit Feher discussing the impact of the legislation approved in parliament earlier in the day on OTP was a plant, Csanyi knew what was up a year ago as did many others. Since almost all the shares Csanyi sold were bought up by foreign investors who thought the then crashing OTP stock looked cheap and thought they were so clever when OTP rose its really a big insider joke on the foreigners.

    US investors who lose money on OTP need to stop crying, insider deals just like Csanyi pulled off have been perpetrated against Chinese investors in the USA repeatedly, but the difference here is the Federal Securities and Exchange Commission does go after the insider deals periodically, in Hungary it’s all a good laugh.

  5. Istvan,

    You’re right, Csányi doesn’t have to worry about his stock, but he’s still in charge at OTP, and after this debacle, the shareholders he doesn’t control may throw him out (depending on what kind of foreign investors are involved). It’s quite clear now that he knew in advance what was going to happen, and the fact that he cashed out probably won’t sit well with sophisticated investors.

    Maybe it doesn’t matter, because he will get some cushy job at the newly-state-acquired savings banks, or he just doesn’t care because he’s so rich, but this will hurt his reputation, I imagine. I seem to remember that he publicly criticised Fidesz for how they were handling this, but maybe that was just for show, a way to make the unenlightened think everything was going to be okay.

    OTP is one of the few large multinationals based in Hungary, so this sort of trick played on foreigners might do more damage to Hungary’s international reputation than people expect. Probably not, though, because most investors just don’t do their own research – they trust people like George Friedman and investment funds like Franklin Templeton to tell them where to invest, regardless of any obvious conflicts of interest or lack of balanced reporting.

  6. Now, as we know by their admission many Hungarian politician (including Orban) did take out the mortgages in question. Many paid it back very fast (just before the “crash”). As we know when the firing was stronger, obviously the banks were at the loosing end on this foreign loan gamble. Does Orban and his politicians will be forced too to repay the losses of the banks they occurred when forint was winning?

  7. Maybe this is a “win” (in Orban books) for Hungary. THis win will be only short lived, as investors just learned how risky is doing business with Hungary. Almost every investment is two sided gamble, as there are inherent risks involved. If the current Hungarian government can go ahead and put in legislation when they are at the shorthand at a “trade”, what company, bank, investor, entrepreneur will be safe?

  8. Éva, what’s your opinion on Albert Pásztor, I’m not really sure who is right about him (Együtt or MSZP -one supports him one opposes him). It was discussed on ATV yesterday, maybe you watched it too:

    http://www.atv.hu/videok/video-20140704-hirvita-2014-07-04

    And do you remember a few months ago all that talk about “Rendpárti MSZP”? Can this be a version of “Rendpárti MSZP”?

  9. Istvan & Googly,

    You seem much more savvy in understanding economics and business than I am but you seem to be ignoring the possibility that this action on the banks will have on the wider economy. Have I misread it? Can the banks be punished in isolation without any scarey side-effects on the wider economy which even (presumably) the regime wouldn’t want?

  10. D7 there is no question that hitting the banks with losses can make foreign direct investment in Hungary’s financial sector more risky. But not doing something about the FX crisis also has its Marco-economic implications in terms of reduced consumption and the general credit power of many Hungarians. The British economist Lord Keynes was reported to have said in relation to deficit spending that you can’t worry about the long run, because in the end we are all dead. He also said the engine which drives Enterprise is not Thrift, but Profit.

    There are for better or worse inherent dilemmas in capitalism. The US in 2008 bailed out the banks on many billions of defaulted home loans, There were laws passed to help the borrowers, but for the most part they lost their homes and had their credit ratings destroyed. This has had an impact here and we still are recovering from 2008. At least in the US we didn’t blame foreign investors for the disaster like I think Fidesz is doing. For every foreign investor making money on the FX loan deals there were also patriotic Hungarians like Sándor Csányi filling their pockets and figuring ways to protect themselves when it all fell apart.

  11. @kommentelo,

    Not to jump ahead on this topic before Eva publishes her piece on it, but I found this development extremely disappointing (eg. MSzP and DK (!) supporting Pasztor ALbert). Aside of the obvious disregard to human rights by Pasztor, the concept of a high-rank public servant discriminating against segments of his own constituency is unacceptable, period. While I can see people making arguments that at the end of the day he is better for the Roma than someone else with Jobbik support, yet this is not a compromise any democratic organization can support. Pasztor could still have come out and say that his 2009 statements were serious mistake and he is fully committed, as a mayoral candidate, to the integration and positive discrimination of the Roma, but he has not done that (at least I’m not aware of it).
    What is the most troubling about this story is that all what seems to have trickled down to MSzP and DK, is that they have to play against Fidesz – as this was another World Cup soccer game! – without truly grasping and owning up to the principles of democracy.
    We should not be mistaken: Pasztor’s 2009 statements cannot be interpreted in multiple ways as the Oszod speech: it was an ugly admission of unwillingness deal with the problems of Roma who make up a significant portion of Miskolc’ population. I’m sorry, this man is not mayor material to be supported by democratic parties.

  12. Just the last letter was missing it seems …

    Now re Austria before WW1:

    That must have been a very strange society, on the one hand those old aristocrats and their “Untertanen” aka subjects – on the other hand those revolutionaries like Karl Kraus and Sigmund Freud or Jaroslav Hasek (remember the good soldier Shveik?) and I’m sure there were many others like them …

    So Austria as an entity had to go – but what might have come after it? Like the aristocratic/feudal system in Germany (or France – 100 years earlier …) there was no logical way for developing it, there could only be a kind of revolution!

  13. Lots of silliness.
    The Empire was one of the greatest powers of Europe.
    My grandfather was born in 1885 in Vienna.
    He and his brothers attended college, MBA type, learned about 4 languages, and were ready for business spreading from Budapest to London.
    If somebody needed psychoanalysis, could seek the services of Sigmund Freud. One of our relatives was probably the Ratman.
    Vienna was similar to Paris or Berlin.
    Budapest became a metropolis built from the speculative profits of the Wodianers, Wahrmann etc.
    They pumped billions of dollars into the development.
    Wahrmann built a palace for himself. Andrassy ut 23.

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