banking

The first state-owned Hungarian bank is already in trouble

Great interest preceded a press conference held jointly by Prime Minister Viktor Orbán and György Matolcsy, governor of the Hungarian National Bank (HNB), this morning. What was so important that these two men would have to appear together in public? It had to be something momentous. Well, it was. The newly “nationalized” Magyar Külkereskedemi Bank (MKB) is in serious trouble and the Hungarian National Bank will assume ownership of it and prop it up.

But let’s start at the beginning. The owner of MKB was the Bayerische Landesbank, a Bavarian state-owned bank, which according to a 2012 decision of the European Commission had to give up ownership of its Hungarian affiliate. That decision was in accord with the Orbán government’s wishes because it is Viktor Orbán’s belief that the majority of banks in Hungary must be in Hungarian hands. Negotiations began back in 2012, but the two sides couldn’t agree on a price. At that point the Hungarian government was offering 100 million euros, which BayernLB found unacceptably low because shortly before the Bavarian bank had to sink 300 billion forints into its Hungarian affiliate. Well, by the summer of 2014 MKB was in the red, so the Hungarian government managed to buy the bank for 55 million euros. Moreover, the Bayerische Landesbank was obligated to give another 270 million euros to MKB. This money was considered to be sufficient to cover possible losses over the next few months. At that point government officials were sure that the bank would be profitable by 2016 “at the latest.” They added that the new owner, i.e. the Hungarian state, would not need to provide any additional capital and therefore “the reorganization of MKB will not burden either the state or the taxpayers.” Three months later we learn that MKB’s finances are most likely in shambles.

What happened between September and December? According to one theory, MKB’s troubles are the result of the government decision to force banks to exchange all mortgages in foreign currencies for forint-based ones. That means a hit of about 25% to the banks’ outstanding mortgages. Of course, all banks will incur losses as a result of this government decision, but the private banks will have to take care of their losses themselves. Presumably they have sufficient reserves. In the case of the newly nationalized MKB, on the other hand, it will be the Hungarian government’s problem. And since the Hungarian government’s coffers are pretty much empty, Viktor Orbán turned to Matolcsy and most likely forced him to come up with 300 billion forints to save MKB.

bailout

This rather unusual step was naturally presented to the public in the best light possible. Instead of telling the truth about the financial troubles of the newly acquired bank, the Hungarian public was told that “the government and the Hungarian National Bank agree that [MKB] must become one of the strongest banks of the country.” Thus they implied that the 300 billion forints was not being spent to save the bank from collapse but was necessary seed money to make this bank the best in Hungary. Viktor Orbán stressed that since “the consolidation of MKB will be done by the Hungarian National Bank it will not cost anything to the budget or the Hungarian taxpayers.” Of course, this is a brazen lie because money at the Hungarian central bank is in fact public money.

According to napi.hu, an internet site formed by former journalists of Napi Gazdaság after it was purchased by Századvég, one reason for passing the bank bailout on to the HNB is that this way the government can avoid parliamentary oversight. That may be, but it is unlikely. Orbán does not have to worry about the parliament and its alleged oversight. However, Napi.hu is most likely right when it finds the whole story suspect. After all, before the purchase it was the National Bank that vetted the bank and found everything in order. On the other hand, János Lázár in an interview that appeared in today’s Figyelő contends that MKB was a badly run bank that was “stolen blind” by unnamed persons. Matolcsy now claims that even before the purchase the Hungarian government was aware that the bank’s portfolio “will have to be cleaned.” So, which is the true description of the bank’s financial health? Is it possible that by exaggerating MKB’s losses more money can be siphoned off from the MNB’s reserves for something other than the “consolidation” of MKB?

Both men emphasized the “reorganization” aspect of the deal and said practically nothing about the bank’s financial troubles. They painted a rosy picture of the bank, which after “a 12-18 month reorganization period will be the best bank of our country.” Here Matolcsy admitted that although the bank has an excellent clientele, the percentage of non-performing mortgages is very high. But once the problems are solved MKB will be the “first fair bank” of the country. There has been a lot of talk lately about “fair banks,” which would function under more stringent scrutiny that would provide better protection to consumers.

The Hungarian National Bank announced today’s decision in the following terms: “Following the decisions by the Financial Stability Board, the MNB [Magyar Nemzeti Bank/Hungarian National Bank] has today taken control over MKB Bank and will reorganize the credit institution, including its subsidiaries.” It is worth noting that the press release emphasizes that “the move has taken place within the legal framework provided by European Union Directives and its responsibilities under Hungarian law.” Or again, a little later: “In accordance with European Union Directives and harmonized Hungarian regulations, the MNB will retain control over MKB Group temporarily (probably for a period of maximum one year).” I always become a tad suspicious when I hear from Hungarian officials that the move they just made is in accordance with EU laws. It usually turns out that it is not.

And what is the long-term future of this new nationalized bank? After the state sinks billions of taxpayer money into it, they plan to privatize it. Most likely on the cheap to friends of Fidesz.

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