Storm Clouds in the East

Hungary may yet turn out to be Europe’s biggest casualty of the present financial mess

There is an old saying that when America sneezes the world catches a cold. Along these lines, the financial mess in the US has been treated by the corporate media around the world as if it were a virus of some sort. Hence, as the US began to feel the squeeze of the credit crunch, Europeans began talking in terms of being well prepared so that they wouldn’t be “affected”. Another oft used phrase was that the credit crunch “hasn’t reached” a certain country yet.

In due course, it has transpired that leading institutions in many European countries have been “affected” by what is happening in the US and that the subprime mortgage crisis has indeed “reached” Europe. Yet the way in which this issue is being presented is more than a little disingenuous; it attempts to hide the fundamental problem afflicting all capitalist societies of the western world. In other words, the underlying culture of greed and denial which is at the core of a rotten system is one that is not something uniquely American. Admittedly, the process may have started in the US; yet most knew they were speculating in a bubble economy. However, considering that the riches to be made while the bubble was growing were extraordinary, most felt it made sense to take huge risks. The payoffs from benefiting from the bubble were enormous, so there was no reward for staying out.

By describing the present problem afflicting financial markets as an infectious virus governments risk making a bad situation even worse. A case in point is Hungary. This small Central European country may yet turn out to be Europe’s biggest casualty of the present financial mess unless it doesn’t take constructive measures to deal with the real problem at hand.

Hungarian political and economic leaders have been adamant that the country’s finances are strong and that it can withstand the present turmoil on the world’s financial markets. They note that the banking system is strictly regulated, even by EU standards. As if to inject a small measure of confidence and pride, late last week Prime Minister Ferenc Gyurcsany gloated at the misfortune of those who had degraded Hungary’s creditworthiness. Despite the fact that some of these institutions eventually became victims themselves to the ongoing financial crisis, the truth of the matter is their underlying analysis with regards to Hungary’s fiscal situation is more or less accurate.

Even the political opposition got into the act and did their best to calm fears. They reinforced the message that the Hungarian financial system was sound and that there was nothing to worry about. This message was repeated by none other than Viktor Orban, the leader of the main opposition party, the FIDESZ. Considering that Orban never comments on economic issues, the fact he felt a need to also raise his voice should in itself raise some concern. Additionally, while noting that the government doesn’t have an emergency plan in place, the FIDESZ has repeatedly called for tax cuts as a way to stave off any problems which may occur.

Rather than be reassuring, these and other recent comments by business leaders and politicians have so far had the opposite effect. The Hungarian stock exchange (BUX) has followed other stock markets around the world and hit a four year low, losing almost 50% in a little over a year. While the stock market doesn’t reflect the true economic picture of the country, the sharp decline in the value of shares over the past few months is a worrying sign for people. Many have their pensions tied to the stock market; in fact, for the past decade new entrants to the labor market have been shut out from the state pension fund and forced into private pension funds. These private pension funds, in turn, invest heavily in the stock market with no guarantees. Thus, a sharp fall in the value of stocks represents a sharp fall in the pensions of many. While those who are in their thirties or forties may still have time on their side and a chance to recoup their losses, those about to retire and who have been taken in by government propaganda that a private pension will bring a greater return than a state pension have been hit hard by the present turbulence on the financial markets.

Thus far, the effect of falling markets on pensions and the like hasn’t been highlighted by the corporate media. Instead, many have focused on the plight of personal savings. While much has been made by governments of the need to guarantee personal savings, the crux of the problem actually lies elsewhere. The credit crunch is not simply about a liquidity problem among banks; if it were so, then the measures being put into place by governments of pumping massive amounts of cash into the financial sector would probably suffice.

Instead, the problem lies in the personal liquidity of individuals. As elsewhere, Hungarians were goaded into taking bad mortgages and financing a lifestyle they couldn’t afford, no less deserve. Banks and businesses of all types simply threw credit at people in an irresponsible manner. Meanwhile government regulators either didn’t pay attention to what was going on or simply turned and looked the other way. As a result, the problem of liquidity isn’t so much in banks not being able to cover the personal savings of customers, but of people paying back their debts to the banks.

Falling stock market, large personal debt burdens, usury, and predatory bank practices all coupled with high inflation and declining real wages

Hungarians have been hit especially hard by all of this. An increasingly greater proportion of the population has taken on debt that they are having trouble repaying. About a third of Hungarians are saddled with some form of debt. At the same time, the actual economic situation within the country doesn’t make such debt affordable. With low wages compared to the rest of the EU along with the second highest tax burden of any member state, the ability to repay such loans is difficult to say the least. Not only this, rising inflation and falling real wages has increased the burden even further.

Already this year there have been a number of suicides and murder-suicides related to bleak personal outlooks for the future. In one case a woman even offered to sell her kidney in order to help make ends meet. What was surprising was that not only were people not shocked by this, but those debating this issue failed to note one important fact: selling your organs is illegal in Europe.

The reasons why many in Hungary have found themselves in financial dire straits are myriad. Some have taken on an increasing debt burden simply in response to the demands of a consumer society. Others, however, have used credit in order to supplement meagre incomes. It’s not unusual to find that personal loans are used for everyday purchases such as groceries. With the start of the new school year last month, for instance, a large number of parents were only able to finance the purchase of books and materials for their children my taking on additional personal loans.

As with the US, the banks in Hungary are foremost to blame for reckless and predatory lending practices. The Raiffeisen Bank, for example, featured television advertisements where loan officers covered their ears as they were not interested in hearing what kind of collateral a person had at their disposal or whether they were even employed. In another such advertisement by the same bank massage specialists and other professionals helped loan officers to regain their physical stamina so they could continue nodding loan approvals to customers.

It is such advertisements and the messages behind them which are foremost responsible for the mess that the US, Hungary, and all capitalist countries find themselves in. The danger for Hungary, therefore, is not so much related to what is happening from without but from within. People have taken on more debt than they can bear; as both inflation and unemployment rises, so does the threat of the credit crunch. It’s not a question of if but of when.

At this point it’s easy to blame the banks for their predatory lending practices and the stupidity of individuals caught in the squeeze of the credit crunch for taking on such debt burdens. Yet a good deal of the blame also goes to the government. Not only was a blind eye turned to the practice of predatory lending in Hungary, but usury and highly speculative lending activities have also been condoned.

In fact, usury is one of Hungary’s biggest problems at the moment. And it not only has to do with the credit crunch. A large segment of the country’s Roma population live in terror as Roma usurers capitalise on the lack of public security in rural areas. Many find themselves at the mercy of usurers as they feel they have no one else to turn to. The police have neither the courage nor the manpower to tackle the problem head on. In many ways, rural Hungary has become “the wild East”, with the usurers in control in much the same way as the mafia in southern Italy. The political establishment, meanwhile, skirts the issue: the left is silent while the right attributes this as a typical of what they see as “gypsy criminality”.

Yet one doesn’t have to look at rural Hungary for the problem of usury. Usury is legal in this Central European country and there are several companies that freely advertise their services on both commercial and state media. One of these is a company called Provident which charges up to 400% for small loans at the equivalent of a few hundred Euros. Provident justifies such outrageous rates by noting that these loans are small and only for a short period of time, and are mainly intended to help bridge unexpected cash flow problems. Still, 400% is four hundred percent.

This isn’t the only problem. In Hungary banks have been making a killing by offering “foreign currency” loans. These are loans in Hungarian forint but based on another currency (usually CHF, EUR, USD or JPY). For consumers, these loans are supposed to provide a lower interest rate. For banks, such loans provide a measure of stability.

The catch is that the final cost of the loan is not only dependent on the interest rate but also the exchange rate. Since the beginning of the year the Hungarian forint had steadily appreciated in value even though economic indicators didn’t support such a strengthening of the currency. As the government earlier in the year abolished the range between which the Hungarian forint could trade, it went from strength to strength against all currencies. This was despite the fact that Hungary’s fiscal outlook was worsening.

In retrospect it’s clear that the Hungarian forint was being used for carry trades. There were a few voices in the wilderness warning against taking on new loans with the Hungarian forint at such an appreciated value. Still, many failed to heed the warnings and the number of personal loans increased. Subsequently, since the end of the summer the Hungarian forint has reversed course and has lost some 10% against major currencies. This, in turn, has substantially increased the debt burdens of people who took on new loans this year.

While the forint appreciated the banks were slow to reflect these changes in the customer loan payments. Now that the tide has turned, the banks have immediately added on the extra that is commensurate with a falling currency. Not surprisingly, many have looked upon Hungarian banks as robbers and cheaters.

This actually is not a new phenomenon. For the past decade many within Hungary have been seething at the banks because of what is widely considered unfair business practices as well as outlandish service charges and bank fees. It should come as little surprise that Hungarian banks have been among the most profitable in the world. Conversely, the quality of the service they offer to consumers has been among the worst.

Given this explosive mixture -- a falling stock market, large personal debt burdens, usury, and predatory bank practices all coupled with high inflation and declining real wages -- Hungary is in a precarious financial situation, indeed. Hungarian leaders may think they have done what they needed to stabilise the situation while business leaders note that the declining stock market is merely a panic reaction by investors. However, there is a lot more to the credit crunch than this. The entire system is broken. What has to be addressed are the fundamentals related to a culture of greed. This means tighter regulations and better transparency. It also means ensuring that individuals are protected from predatory lending practices which not only put them at risk, but the entire financial system as well.

So far, Hungary has adopted the same strategy as other European countries: make promises to shore up the financial sector and hope that the problem somehow goes away on its own accord. This is not enough. The mess that capitalist countries around the world are in isn’t simply because America sneezed and everyone caught a cold; capitalist countries around the world were sick to begin with. Therefore, unless proper action isn’t taken to treat the illness and not just the symptoms, Hungary and many others will be under the weather for some time to come.