The latest joke from Hungary says as part of its cost-cutting measures the government has now switched off the light at the end of the tunnel. But seriously, the situation in Hungary is dire and people with consumer credit and mortgages are among those most badly affected. Years of living on credit have had a negative impact on the whole of society, on its standard of living as well as its confidence.
When President Barack Obama and British Prime Minister Gordon Brown tried to find a particularly contemptible and frightening word to exemplify the current economic crisis the one that came to their mind was: Hungary. Hungarian Prime Minister Ferenc Gyurcsány’s begging mission to Brussels was a fiasco: he failed to negotiate more lenient conditions for joining the euro, the forint has reached a historical low and the Hungarian Finance Minister was compelled to issue an assurance to the public that the country was not on the brink of bankruptcy. On 6 March things went so far that the Hungarian banking association was obliged to publish an official statement assuring people that individuals’ savings would not be frozen.
How could Hungary have sunk so low? The Hungary that under the ‘really existing socialism’ used to be the merriest barrack in the Soviet bloc, the country that made the first dent in the Berlin wall and was the darling of foreign investors in the early 90s?
Today the whole country is frustrated. People are despondent about the recession, the mass layoffs, the depreciation of the currency, and tens of thousands of families are unable to keep up their credit and mortgage payments. It is depressing enough to consider that neighbouring Slovakia has overtaken Hungary in several indicators and is enjoying the euro while Budapest is unable to meet a single criterion for joining the Eurozone. And when Obama talks about Budapest, he mentions it in the same breath as Kiev.
The story of the crisis
The end of communism found Hungary knee-deep in debt: in 1989 the country’s foreign debt amounted to some 20 billion dollars. In fact, the country has had huge debts for decades, and as early as 1982 it was on the verge of state bankruptcy and had to seek shelter under the IMF and World Bank umbrella. Hungary has not been able to shake off its burden of debt since, and although it has been gradually paying it off, servicing a debt in excess of 50 billion dollars has brought the country to the end of its tether.
It is worth noting that the Hungarians never took the fall of communism and the change of regime seriously enough. Having always looked up to the Austrians – just as the Slovaks have always compared themselves to the Czechs – they thought the transition to a market economy would simply mean the arrival of Austrian-style prosperity. The Hungarians’ reading of the fall of the Iron Curtain amounted to we shall all be able to buy a colour TV and a fridge in Vienna’s Mariahilferstrasse, our gardens will blossom and everyone will be happy and prosperous. A superficial perception of the realities under socialism and the creature comforts of the Kádár years prevented the Hungarians from seeing the situation as it really was.
This might also explain why in 1990 the country was paralysed by the first price liberalization while Czechoslovakia survived the shock therapy without major upheavals. When you look at our defeated country stumbling from crisis to crisis, you will encounter a sea of concerned and gloomy faces. You might add that our country is also a humiliated country. We feel humiliated by our own failures and by our neighbours’ successes. Particularly since, as recently as in the early 90s, we were a young, promising democracy, says social scientist Elemér Hankiss of the Hungarian Academy of Sciences.
The failure and humiliation were quite predictable, as instead of major reforms which would have been as painful as they were necessary, the change of regime was followed only by the minor and then the major privatization. The first time the country nearly went off course was in 1995, when Lajos Bokros (whose name many still consider a synonym for a swearword) was appointed Finance Minister. He forced Gyula Horn’s socialist-liberal cabinet to introduce unpopular restrictions which were vital since the country’s economy was at a dead end. It was only due to these measures that Viktor Orbán and his rightist-populist Fidesz party inherited a more or less financially stabilized country in 1998. However, the problem was compounded by an increase in state expenditure. In 2001, in order to marginalize a junior coalition partner, parliament approved a two-year budget that increased the minimum wage by 50% overnight, hiking wages abruptly rather than gradually.
Before the next general election both sides of the political divide showered the Hungarian public with promises. Both the Hungarian Socialist Party (MSZP) and Fidesz promised heaven and earth: a thirteenth-month salary, a thirteenth-month pension, and all sorts of state benefits. Although this is usual in campaigns, in this case the result was tragic: the victorious socialists under Péter Medgyessy began to fulfil their election promises, initiating an unprecedented salary hike which, however, was not backed by economic performance.
The burden of debt
The next socialist Prime Minister, the current incumbent Ferenc Gyurcsány, who took over mid-term in 2004 and then won the election of 2006, has not carried out any reforms either. In the summer of 2006 he actually admitted as much in his notorious speech at Balatonöszöd. As Socialist MPs met behind closed doors to discuss the government’s performance he said: We did nothing. We lied day and night. We don’t have much choice because we screwed up. Not just a little. We screwed up in a big way. Unfortunately, he was right.
Although the Prime Minister likes to talk and lecture on reforms, he has not introduced a single one and his government was not even up to reforming the health system. The introduction of doctors’ and hospital fees was undermined by a referendum which received vocal support from Fidesz. However, Hungary’s hour of truth arrived with the global financial crisis. It became clear that there are limits to clever tricks and running on credit. The economic situation is ominously similar to that in October 2008, when Hungary was on the brink of state bankruptcy. At that time the country secured 25 billion dollars worth of credit from the IMF and the World Bank. That helped to calm passions for a few months but following the failure of Gyurcsány’s begging mission to Brussels the Hungarian forint detached itself from the devaluation rate of the Polish zloty and the Czech koruna, plummeting to a historical low on 6 March 2009.
The exchange rate of the forint to the euro on the interbank market sank to 317, compared with 240 in July 2008. This is disastrous for a significant part of the population that is likely to default on its credits. Because Swiss and Japanese banks offered better interest rates the greatest part of Hungary’s consumer credit was taken out in Swiss francs and yen. Most people took out credit at a time when a Swiss franc bought 159 forints but since the exchange rate went up to 215 forints, the average monthly mortgage payment has risen from 40,000 to 60,000-70,000 forints.
There are, however, even more tragic cases. The majority of people took out credit to pay for homes, and it was particularly young families with children who bought apartments and houses in this way. Our parents wanted to help us and guaranteed our mortgage with their own house. Now both our apartment and their house are mortgaged. And we are not alone. And once people start defaulting on their credit on a massive scale the banks won’t have any qualms about claiming both pieces of real estate because, after all, its value has gone down while the Swiss franc has been going up, says a young man from Budapest, in his late twenties.
And his job is also at risk. When I applied for my mortgage, they assured me that the Swiss franc was unlikely to go up too much. Who was I supposed to trust if not mortgage experts? Until recently my monthly payments were 160,000 forints, but now they are 235,000-240,000. Our family savings will be gone in a few months and we won’t be able to keep up the payments. Where will we go? Will I end up on the street, along with my children, wife and parents? And our case is far from unique; thousands of people are in a similar situation.
Reports on cases like this can be seen on TV almost daily and the journalists only need a few minutes to find suitable people to feature. (NB Over 80% of Hungarians own their own homes and the rental market is almost non-existent.)
Last year the average gross monthly income was 198,000 forints, so it is easy to imagine how hard people have been hit by the currency’s fall, particularly given that last year total household debt reached 11.8 billion. According to the stress test applied by the Hungarian Currency Bank, if the forint goes down to 320 to the euro it will result in credit defaults on a massive scale.
The question is whether the forint will reach this level. Nobody knows what the population’s actual savings are and what their income from the grey economy is. While people with mortgages will fight to their last breath to keep their homes, car dealers have already started offering cars without any down-payment. All you need to do is take up credit or lease the car; car owners who have overestimated their finances can always get rid of the car. To hell with it, along with the credit!
The disabled cruising on the Titanic
The absence of reforms and a spendthrift culture made Hungary run on a deficit. The country of a thousand back doors can no longer sustain its social network. It was the system of back doors that granted disability pensions to a huge number of people: over 840,000 individuals, more than following World War II, are currently registered as fully or partially disabled.
What did Gyurcsány’s cabinet do to improve the situation? The answer is simple: nothing. We are witnessing something akin to a firework display. As soon as one firecracker goes out another one is ignited. In this case the firecrackers are reform programmes that are currently being launched on a weekly basis, says renowned economic and academician László Csaba.
At the height of the 2006 crisis in the wake of Gyurcsányps Balatonöszöd speech, the public finance deficit reached 10% of GDP, well in excess of the 3% stipulated by the Maastricht criteria. Hungary’s economy effectively stopped growing in 2007 and last year plunged into depression. This year predictions are for a negative growth in GDP, between -3.5% and -5%.
We are cruising on the Titanic, even as we polish the family silver, says László Parragh, head of the Chamber of Industry. Instead of launching reforms Gyurcsány is behaving like a Hungarian hussar: he has tried to lead the country into the safety-net of the Eurozone in a single charge. However, the response from Brussels was negative: conditions are there to be met. National Bank governor András Simor agrees and comments on the Brussels failure: It’s about time we stopped looking for back doors and started working seriously towards entry into the Eurozone.
And what of the future?
The next general election is due in 2010, unless, that is, the growing chorus for an early election proves irresistible. The opposition party, Fidesz, has been trying to bring about early election ever since the publication of Gyurcsány’s Balatonöszöd speech – first through street riots, later by means of public appeals. Meanwhile, the situation continues to deteriorate. According to official Eurostat data, three of Hungary’s regions are among the poorest in the EU, a status even eastern Slovakia has managed to escape. In terms of GDP per capita, Prague and Bratislava have long overtaken Budapest.
And things could get even worse because the above data are from 2006 and Hungary has been – at best – stagnating since then. The economic collapse of some parts of society has already affected the crime rate. In the first six weeks of this year there were as many bank robberies as over six months of last year. Ethnic tensions are on the rise, with the foreign media reporting attacks on the Roma while on the other hand the domestic press focuses on Roma crime.
“The incompetence of the politicians means that the pressure for change may well come from the streets, warns Sándor Demján, one of the richest Hungarians and head of the international estate agency TriGránit. This, of course, is the worst-case scenario but it is by no means impossible. Over the past three years Budapest has seen several street riots, and football hooligans and extreme rightists even managed to occupy the state TV station briefly. That the declining middle classes might join in the rioting is not out of the question. There will certainly be no shortage of bankrupt debtors on the streets.