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.

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.

The Hungarian central bank goes on a buying binge

It was on August 3 that I first read about the so-called Borbély castle in Tiszaroff. It was refurbished after the change of regime and was owned by a German businessman who made a four-star luxury hotel out of it. In the wake of the recent downturn in the economy, however, the business failed, and the owners put the property up for sale. The article I read in Vasárnapi Hírek reported on rumors circulating in the village that the Hungarian National Bank had purchased the castle for use as a vacation resort for the central bank’s employees. And indeed, a week later it became official. The bank purchased the property for €1.3 million (415 millon HUF).

Kester Eddy, a reporter for the Financial Times, had a great time writing a story about the purchase. It reminded him of the days when, under communism, state companies and institutions owned holiday properties so their employees could spend two weeks splashing around in Lake Balaton. The bank struck back and explained that “the Magyar Nemzeti Bank, like other EU central banks, seeks to provide its more than one thousand employees with fringe benefits.” Moreover, the castle-hotel is located in the country’s least developed region and by opening the hotel again “more than 30 new jobs have been created.” Between May and the end of August it will function as a recreational center and between September and April as a training center.

The Borbély Castle-Hotel in Tiszaroff on 3.5 hectares

Earlier the Hungarian National Bank had seven different vacation homes, but by 2009 the bank sold them off one by one. In these still difficult economic times it is hard to justify buying a luxury hotel even if the price was apparently attractive. The owners asked 680 million forints for it, but the bank managed to purchase it for a mere 415 million. Moreover, Matolcsy pointed out that the bank had earned a profit of 26.3 billion forints and therefore the purchase did not cost taxpayers a penny. An interesting explanation from a central banker.

The brouhaha over the purchase of the castle-hotel had barely died down when HVG learned that the Hungarian National Bank also bought perhaps the most expensive office building in Budapest, the eight-story Eiffel Palace. Originally it was rumored that some of the offices of the central bank would be moving into the building. Portfolio thought that purchasing a class A office building was an acceptable business concept. Others were less sanguine. For example, the popular blogger orulunkvincent.hu. According to him, the price was €57.5 million (18 billion forints) and the building has 14,000 square meters of rentable space. In calculating the potential return on this investment he assumed the top rental rate for space in a green building, €13.5 per square meter. In downtown Pest 86% of the available office spaces are occupied. If the Eiffel Palace has the same occupancy rate its gross annual rental income would be €1,950,480. Assuming an 80% profit and 10% tax, the net rental income would be €1,404,346 per year. That means a return of 2.44%. Five-year government bonds have an interest rate of 4.70%. So, says the blogger, this deal does not sound so fantastic to him.

According to critics of the deal, the Hungarian National Bank grossly overpaid the owners of the Eiffel Palace. They paid almost 18 billion forints when according to real estate assessors it is not worth more than 11-12 billion. E-PM will go to court in connection with the purchase of the office building because it suspects malfeasance or a breach of fiduciary responsibility on the part of the central bank.

But these two purchases were nothing compared to yesterday’s revelation. HVG learned that the central bank had transferred 200 billion Hungarian forints to its five foundations named after Pallas Athena, the goddess of wisdom, courage, inspiration, civilization, law and justice, just warfare, mathematics, strength, strategy, the arts, crafts, and skill. A perfect description of Hungary today!  This amount is one and a half times more than the Hungarian government spends a year on higher education.

Initially it was known only that this money will be spent on education. Today the central bank released details of its project. “We are creating a faculty of economics and finance at Kecskemét College, a faculty of finance in Marosvásárhely/Târgu Mureș (Romania), a doctoral school in the Buda Castle, and an intermediate financial training center in Pest.” The reason? “The already obsolete doctrines and mistakes of the neo-liberal school of economics continue to dominate Hungarian education in economics and finance.” Since Matolcsy thinks that mainstream economists in the country–and that means practically all respected experts–are wrong and since he cannot get rid of them, he will build parallel economics departments that will teach his unorthodox economic theories. Just as the Orbán government needs an alternative Holocaust Museum and an alternative academy of artists it also needs a new set of economists who will be the high priests of unorthodoxy.

Matolcsy admitted that it will be an expensive undertaking because, after all, they need “new institutions, professors of new vision, and new teaching materials.” Creating new institutions will probably be the least of Matolcsy’s problems. Where will he find those professors of new vision? Where is he going to find new teaching materials? Perhaps he is planning to write them himself because I can’t believe that any self-respecting economist would be willing to write textbooks acceptable to Matolcsy.

I tried to find out more about the institutions mentioned and, as far as I can see, only two seem to exist. The Kecskeméti Főiskola at the moment does not teach economics. It has one section that produces elementary school teachers, another where they teach information science, and another that specializes in what Hungarians call “kertészmérnöki kar”–less elegantly put, gardening and landscaping. This college was established in 2000, i.e. during the first Orbán administration. The second institution, in Marosvásárhely/Târgu Mureș, is not mentioned by name, but I guess it is the Sapentia Hungarian University which was established in 2001 and heavily subsidized by the Hungarian government. I remember that shortly after the 2010 election Viktor Orbán made a trip to Târgu Mureș and gave a billion forints to the institution. As for the others, I assume they will be established sometime in the future.

I used to think that I could not be surprised by anything that is done by this administration, yet I am surprised time and again. It is really frightening how much power is in the hands of people whose sense of reality is greatly impaired.