The latest nationalization plan: Dunaferr

Members of the Orbán government don’t like the word “nationalization.” To be precise, they don’t like the Hungarian word államosítás for nationalization. After all, they claim, the word államosítás can be used only for nationalization without compensation. As it happened after 1945 and especially after 1948. Today the state simply buys companies the government deems strategically important. Mind you, as usual the Orbán government doesn’t tell the whole truth about the recent nationalizations. After all, one of the first  moves of the Orbán government was the nationalization of public schools previously in the hands of the local communities. No one compensated them for their loss. The next step was the nationalization of hospitals. Again, no money exchanged hands.

This government seems to be enamored with the old socialist system of state ownership and centralization although they should be the first ones to realize its pitfalls, which eventually led to the total collapse of the socialist system. But I guess they think they can do better than those old party hacks. I don’t think that I’m alone in thinking that Orbán and his comrades are dead wrong.

I could go on and on listing companies, from MOL to E.ON and Rába, that have been taken over either in full or in part by the Hungarian state. E.ON cost the Hungarian taxpayers 870 million euros and MOL,1.88 billion euros. And now the Hungarian government has offered to buy the ISD DUNAFERR Company Group in Dunaújváros, which is one of the largest industrial firms in Hungary. The company is a diversified manufacturer of steel products. They produce hot rolled, pickled, cold rolled, galvanized strips and sheets, and hollow steel sections for engineering, automotive, and construction products as well as for the production of steel structures, household appliances, and other parts.

The company, owned early on by the Hungarian state, lost money year after year until the government managed to sell it to the Ukrainian Donbass Group in 2004. Later it was taken over by a Russian company. Eventually, the company became profitable but since the 2008-2009 financial crisis Dunaferr has suffered mightily. In an article that appeared on privatbankar.hu today one can see telling graphs of Dunaferr’s losses and debts.

A few days ago the company announced that because of its financial losses, it will have to let 1,500 workers go. Such a decision came at a very wrong time for the Orbán government. Dunaújváros plays a key role in the economy of Fejér County. We must also keep in mind that Viktor Orbán’s beloved Felcsút is also in Fejér County. Székesfehérvár, the first capital of Hungary, is the county seat and the city to which the Orbáns eventually moved and where the young Viktor went to high school. So, the whole issue has a personal aspect for Orbán as well.

On Monday morning Economics Minister Mihály Varga was dispatched to talk to the managers of Dunaferr in order to find a solution to the company’s problems. I assume Varga tried to convince the management of Dunaferr to postpone its decision to downsize its work force.  No buyout offer was discussed.

The decision to make an offer was reached hastily that same day during a cabinet meeting, which was conveniently and appropriately held in Székesfehérvár due to the August 20th celebrations.

Such quick decisions are typical of Viktor Orbán’s leadership style. I am certain that this particular decision, just like all the others, was the prime minister’s alone. Given the company’s dire financial straits it’s hard to imagine that no one in the cabinet raised doubts about the Hungarian state’s ability to take on another losing concern. But at these meetings Orbán is surrounded by yes-men; he doesn’t have to fear serious opposition. Perhaps at the meetings of the high brass of Fidesz there are men like László Kövér or even János Lázár who can have some influence over him, but such people don’t exist among the few ministers and the more numerous undersecretaries handpicked by the prime minister.

In the past it happened that the Hungarian state took over companies allegedly in order to prevent a loss of jobs and yet shortly after the nationalization the new owner, the Hungarian state, had to fire hundreds or even thousands of workers. In the case of Malév, the airline actually folded. It would be good to know whether the government has any business plan that would enable the company to continue employing its 7,500 workers and at the same time turn a profit.

I very much doubt that there is such a plan, so it is likely that sooner or later Dunaferr, this time as a concern owned by the Hungarian state, will have to let thousands of workers go. (Probably after the 2014 elections.) Meanwhile good money is being thrown after bad, as the saying goes. How long can all this go on, especially since only today I read that the deficit is on the rise again?

Politics and finances: Orbán’s Hungary today

Judging from the comments, most readers of Hungarian Spectrum consider Sándor Csányi’s spectacular exit from the ranks of shareholders of OTP an event that overshadows all other news, including whatever the current opposition is doing. Perhaps in the long run the panic that took hold of Budapest yesterday following the precipitous fall in the stock price of Hungary’s largest bank might prove to be more significant than any purely political event. However, what happened at OTP cannot be separated from politics.

By now we know that even before Csányi, the CEO of OTP, decided to sell his OTP stock worth about 26 million euros, some other high-level officials of the bank had already gotten rid of theirs. I assume they sold because of the probability that the government will “take care of the Forex loans one way or the other.” The exact way is still not entirely clear, but it is likely that the banks will again be the ones that will have to bear the financial burden of the “government assistance.” This rumor began to circulate about a week ago.

And then came Viktor Orbán’s interview with Margit Fehér of The Wall Street Journal. In this interview Orbán made it clear that the bank levies are here to stay. He has reneged on his initial promise that the very high extra taxes on banks would be needed for only a couple of years. Now the official position is that the bank levies will remain until the national debt is under 50% of GDP–perhaps in ten years “if the euro zone could do better.”

Another political decision that most likely had an impact on the misfortunes of OTP was the government’s abrupt announcement of the “nationalization” of 104 credit unions privately owned but functioning under the umbrella of TakarékBank Zrt. TakarékBank and its credit unions are really the banks of the countryside. They are present in 1,000 smaller towns and villages, which means that they cover about a third of all Hungarian communities. One can learn more about TakarékBank here. One thing is important to know. TakarékBank was run by and with the consent of the individual owners and board members. Clearly, the state wants to take over the whole organization and most likely run it as a state bank. What is happening here is no less than highway robbery. As some people said, the last time something like this happened in Hungary was during the Rákosi period. Sándor Demján, chairman of TakarékBank’s board, swears that they will keep fighting all the way to Strasbourg to prove that what the Hungarian government is doing amounts to nationalization without any monetary compensation.

If Orbán succeeds in the nationalization of TakarékBank, it might pose a serious threat to OTP. All in all, it’s no wonder that OTP officials didn’t think that their investment was safe. The alarm bell might sound in foreign banks as well (don’t forget that Orbán’s plans include a banking sector that is at least 50% Hungarian owned), and if that happens the whole banking sector might collapse. But I guess that would fit in with Orbán’s goal of tearing down all the carry-overs from the past and replacing them with his own original creations.

Let’s return now to the interview Orbán gave to The Wall Street Journal. Some of his statements are just a regurgitation of what he said in his rambling speech to the foreign ministry officials about a week ago but this time in even stronger language. For example: “The future of Europe is Central Europe” and by “now we are once again part of [this] powerhouse.” He also repeated some of his often used lines about the nonexistent strides Hungary has made since he took over: the national debt is falling, foreign trade is rocketing, Hungary no longer needs “other people’s money,” unemployment is falling, and finally that when he took office only 1.8 million people paid taxes but now that number is “close to 4 million.” No one has any idea where Orbán got his figures about the number of taxpayers, but they bear no resemblance to reality.

The interview is a rare self-portrait that could be the topic of another post, but here I would like to bring up two points.

This is the first time, at least to my knowledge, that Orbán openly declared that he really doesn’t want to join the eurozone. This despite the fact that Hungary is obligated to adopt the euro as the country’s currency since it was part of the conditions for membership in the European Union. But today Orbán thinks that Hungary “should exploit the advantages of not being in the eurozone.” I was already suspicious when he insisted that the Constitution should include a sentence stipulating that Hungary’s currency is the forint, but in the interview he was quite explicit on the subject: to change the constitution’s declaration that Hungary’s currency is the forint “will require a two-third vote of Parliament. So, to join the euro will require a strong, unified majority. This guarantees that it will not be a divisive issue. Whether Hungary joins will depend a lot on how well the new, integrated eurozone functions.”

http://www.lorettahelson.com

And finally a point that might interest amateur psychologists. Orbán said: “When you have to save your country, to renew your country–that is when a job like this is appealing to someone like me. This is a real challenge, not just like reorganizing a bureaucracy. People like me, we like to do something significant, something extraordinary. History has provided me that chance. Actually, it provided it three times. I’ve always gotten historical challenges as a leader. When things are going well, I seem to lose the elections, because the people don’t need me anymore.” There is a Hungarian saying “A próféta szólna belőled!” meaning I hope your prophecy comes true. But all joking aside, it seems that Orbán is not confident about winning the next elections. He is afraid that all his extraordinary accomplishments will only make an opposition victory more likely. I guess the winning campaign slogan, contrary to everything we know about electorates, would be: “If you’re better off than you were four years ago, throw the bum out!”

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

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?