HUNGARY BLOG: Orban the (accidental?) genius

By bne IntelliNews January 16, 2015

Tim Gosling in Prague -


With protestors filling the streets and his ruling Fidesz party seeing its support plummet, Hungarian Prime Minister Viktor Orban is regularly called a Viktator, a patsy for Moscow and a corrupt administrator feeding his friends at the expense of international investors. Today, however, he looks more like a financial genius.

Central European markets were sent into a tailspin on January 15 as the Swiss central bank dropped its cap holding down the value of the Swiss franc against the euro. Loaded with as much as CHF12bn of Swiss franc debt – a consequence of Hungarian borrowers having taken out lots of mortgages in the currency – Hungary was the "obvious risk hotspot" in the region, noted Tatha Ghose of Commerzbank. Until the turn of the year that is. 

A controversial government scheme to force the conversion of such foreign exchange loans into forint was finally pushed through in December. Hungary escaped by the skin of its teeth, with both borrowers and the banks swerving a major potential car crash of spiraling losses.

Budapest is all smiles, and for once comes up smelling of roses. Meanwhile Poland – the much admired "star" of the region – is left to take the biggest hit and its regulators look behind the curve.

The markets were ready to jump on Hungary. The forint plummeted to record lows against the euro by mid-morning January 15, and dropped  to HUF315 against the Swiss franc after opening at HUF266.

However, it was then reminded that the bulk of the 1.3mn Hungarian households previously holding Swiss franc debt are already in the midst of converting them to forints at a rate of HUF256.47 to the Swiss franc. The National Bank of Hungary, meanwhile, had tendered €9bn to the banks in November, with most heading straight out to use it to buy up Swiss francs. “It’s kind of like Hollywood. Just before the final blow, they escaped,” suggested one economist at a major Hungarian bank.

At one time the bank sector was exposed to the tune of CHF12bn; it's now likely as low as CHF1bn-2bn, analysts estimate. “Households have €1.8bn worth of CHF-denominated debt left, mostly related to car lease contracts, thus the impacts on consumption is likely to be negligible,” suggested Esther Gargyan at Citigroup.

That leaves the Hungarian government "looking like financial experts of the highest calibre," Commerzbank analysts note with (presumably) a healthy dose of irony.

Bring out the trumpets

Orban and his cohorts have warned for years about the danger of the huge volume of forex debt held by Hungarian households. In the boom years, Hungarians rushed to take advantage of the lower borrowing costs on Swiss franc-denominated – and to a lesser extent euro-denominated – mortgages as the forint went from strength to strength. The banks eagerly fed that appetite.

But since the 2008 crisis boosted safe haven currencies and buckled the likes of the forint, borrowers have been struggling, especially under contracts that the European Court of Justice ruled last year contained unfair provisions.

Orban's clumsy and populist attempts to redress the balance – alongside his other sins – have provoked huge international criticism, even while the banks are pilloried in the West for their greed.

Indeed, coming on top of a pair of huge levies placed on the banking sector since Orban took office in 2010, the treatment meted out to lenders has certainly been rough. That has seen them pull in their horns, with lending to the economy dropping sharply, while also deterring international investment.

At the same time, Orban's efforts to push forex debt out of the market looked for all the world to be motivated primarily by populism and his lust to free his authoritarian hand, rather than economic foresight. The PM has happily told the EU – and even Washington – where to get off in criticizing his moves to consolidate power. However, whilst forex debt exposed the forint and the economy, he struggled to shake off the restraining hand of the market.

Policy over the last five years has left the government as the primary driver of investment and lending, and there are few apparent bright spots on the horizon. Analysts across the board suggest the momentum is running out, and that the impressive growth of 3.2% last year is likely to drop to around just 2% in 2015. That looks less like financial genius.

Yet Fidesz of course wasted little time in trumpeting its starring role in Hungary's close escape, especially as it seeks to shore up its support. The party has seen its approval ratings almost halve to just 23% over the past three months due to a series of missteps. Economy Minister Mihaly Varga claimed on January 15 that the policy had just saved Hungarian households from a HUF500bn boost in debt.

Dumb luck or wisdom beyond the norm, Hungary's policies are now thought likely to attract the attention of populists in other countries in the region struggling with forex debt. Poland is top of the pile, and it's little surprise the opposition Law and Justice (PiS) has already called for a similar policy to Orban's ahead of elections in the autumn that are likely to be closely contended – despite the fact the Swiss steed has already bolted.

“When an earthquake hits, the government has to act,” demanded PiS lawmaker Pawel Szalamacha at a news conference on January 16, according to Bloomberg. “We propose to allow Poles to pay off their loans at an exchange rate from before the earthquake.”

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