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János Rékasi: The euro-goal will be one of the most important priorities of the next Hungary government

Olga Pavuk, Dr.Oec, BC, Riga, 24.02.2010.Print version
On the eve of the Round table dedicated to the banking crisis lessons in Baltic states BS met with Janos Rekasi, DEC vice-president, Counsellor, Embassy of Hungary in Estonia and Latvia. The conversation was about the lessons learnt by Hungary after the financial crisis, as both Latvia and Hungary had to turn for intenational organization assistance.

The article is prepared for the Round Table “Baltic States' bank sector: lessons from the modern crisis”, organised by the Baltic International Academy, Latvian Employers Association and International Web-Magazine The Baltic Course on 24st of February in Riga, Latvia. 

János Rékasi.

BC: What happened in Hungary when the international financial crisis broke out?


János Rékasi: In October 29, 2008 the IMF, the European Union and the World Bank agreed to a 25,1 billion rescue package for Hungary to help it cope with the global financial crisis. From part of IMF the sum was $15.7 billion loan deal, while the European Union stood ready with an additional $8.1 billion in financing and the World Bank another $1.3 billion.


"The Hungarian authorities have developed a comprehensive policy package that will bolster the economy's near-term stability and improve its long-term growth potential," IMF Managing Director Dominique Strauss-Kahn said in a statement. And he followed: "At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets." He noted “Important measures in the fiscal area will reduce government- financing needs and ensure longer-term debt sustainability”, and the whole program will improve Hungary's fiscal balance and strengthen its financial sector. "Specifically, the package includes measures to maintain adequate domestic and foreign currency liquidity, as well as strong levels of capital, for the banking system," he said.


BC: Why Hungary was so much hit by the international crisis?


R. J.: Similar to other developed countries, banks in Hungary faced liquidity problems after the outbreak of the crisis. These included general liquidity enhancing measures such as the reduction of the reserve ratio (from 5% to the 2% applied by the ECB), the expansion of the range of eligible collateral, as well as purchase of government bonds in the secondary market.


Hungary was extremely hit by the financial crisis because its banking system was heavily exposed to foreign financing at a time when investors were pulling back from developing economies worldwide. Other countries were facing similar problems and why Hungary was the first country who turned to IMF-loan?


The crisis found Hungary in a very vulnerable condition because:

  1. Hungary has a large debt -- the gross external debt of the Hungarian state and companies amounted to 89.9 billion euros or 93.8 percent of gross domestic product (GDP) in the second quarter of 2008, while net debt was external 46.3 percent of GDP.
  2. Hungary had an excessively loose fiscal policy between 2001 and 2006 and this boosted the budget deficit to above 9 percent of GDP. Following a mini financial crisis (and run on the forint) in the summer of 2006 the Hungarian government adopted an "adjustment programme", whereby tough measures were introduced by the government to cut the deficit, which has been falling and is now projected to reach 3.4 percent in the last year.
  3. Hungary were running a serious current account deficit for years, and although it has been improving, still it was 7.1 percent of GDP in 2008.
  4. In similar fashion to Spain, for example, Hungary needed to refinance its existing household and corporate debt by issuing both forint-denominated and foreign currency bonds, and it is this rollover which became suddenly much more difficult due to the global credit crunch.
  5. Hungary had the twin deficits problem and one of the main problems Hungary was facing in the autumn 2008 that if foreign currency lending continued to be discontinued in Hungary on a "sudden stop" basis, then this would mean that domestic economic activity would slow sharply and capital inflows would be considerably reduced which was bound to cause one hell of a problem since at that time these capital inflow amount to about €3-€4bn a year, and were close to providing the cover needed to fund the ongoing current account gap.
  6. The relevant part of household and corporate dept has been in foreign currencies (euro, Swiss franc, yen) and the loan/deposit proportion in foreign currencies were high, above 100% and only the loan/deposit proportion in forint were about 50%.
  7. As suddenly the international community recognized how vulnerable is the Hungarian economy, and as the liquidity dropped radically the euro/forint course started to augment rapidly. In a short time the euro had 20-25% more value threatening the debtors but boosting the export. 


BC: What kind of measures has Hungary introduced following the IMF-agreement?


R. J.: Hungarian economy and financial policy management by the Government had and have to face a lot of challenges while correcting mistakes made mostly in the past. These mistakes were like extremely high current account deficit, growing debt of country, augmenting the social benefits without any financial background, very low rate of employment, reducing VAT, etc. Maybe only the crisis could force the political elite to make quick changes in order to stabilize the fiscal and financial situation and the labor market, to improve the economic climate for companies and to give life-belt for endangered private and corporative debtors. 


I think to the topic today the fiscal consolidation and the measurement in the financial sector might be the most interesting. Now we can already see Hungary has been capable of a huge fiscal consolidation in a short period in the most difficult times of the crisis. Besides elimination of 13th month pension benefit and restructuring family allowances in total many other measurements were taken in order to reduce public expenditure. The list only the last year’s most important measures the following should be mentioned:

  • Hungary changed pension indexation with anticyclical effects for the subsequent years;
  • Hungary modified the conditions of early retirement with the pension benefits included. Retirement before the statutory age shall involve lower pension benefit;
  • Retirement age will gradually increase from 2012 by six months each year until 65 years of age both for men and women;
  • Hungary restructured our too generous housing subsidy scheme including the elimination of interest subsidies and social policy aid replaced by a narrower new subsidy scheme;
  • Energy price subsidies will be phased out of the social policy system in 2010;
  • Hungary changed the method of sick-pay disbursement with a general rate lowered by 10 percentage points;
  • Entitlement criteria of family allowance were modified. Now it is available only until the lower limit of age;
  • Hungary changed child-care subsidies with shorter periods of eligibility for both child-care allowance and child-care aid;
  • Headcount stop entered into force in government agencies from the summer of 2009;
  • Nominal wages were frozen for those employed in the public sector;
  • To limit spending on curing and preventing healthcare services, hospital financing regulation was created in support of focussed hospital care, i.e. the so-called “performance limit-based accounting system”;
  • Scheme of Treasurers was set up from the summer of 2009 to ensure disciplined budgetary management.

Measurements related to the financial-banking sector: 


1. In order to protect the citizens and to strengthen confidence in the banking system:

  • The Parliament increased the deposit guarantee limit by National Deposit Insurance Fund from HUF 6 million (~ EUR 22,000) to HUF 13 million (~ EUR 47,000). Parliament declared that to ensure the safety of deposits, the government would guarantee the portion of savings exceeding the level of coverage provided by the National Deposit Insurance Fund.
  • State guarantee for home-loan debtors who have lost their jobs due to financial crisis. Pursuant the new low, the consumer will have to pay a minimal monthly repayment =around HUF 10,000 = EUR 380) per month for a period of two years and the government will provide a guarantee for the outstanding dept.
  • 11 banks in foreign currency lending signed a Statement, committing themselves to trying to mitigate, through specified measures, the burden on households caused by exchange rate fluctuations and the ensuing temporary increase in the repayment amounts. The available options include the extension of maturity, the conversation pf loans into domestic currency, the temporary easing of repayments on a case-by-case basis, and flexibility on early payments.
  • Higher loan amount for students whose family attached by the crisis.


2. In order to strengthen the financial stability:

  • 600 billion foint appropriation for banking sector to improve their capitalization.
  • 400 million EUR loan from EIB – it should provide the necessary financial self-part for applicants at EU-tenders.
  • Enhancing the licenses of Hungarian Financial Supervisory Authority as it could better prevent the interest of depositors and control preliminary the local financial system.


The Hungarian banking system was not hit as much as in other countries have usually happened. The reason was that in Hungarian banks were even before the crises following a conservative lending policy and for example in real estate business banks have given credit up to 70% of the total value. The significant majority of Hungarian banks are subsidiary of big European and American banks and the Hungarian companies were growing much faster than the main companies and the profitability was also better at the Hungarian banks. Loans with repayments overdue at Hungarian banks are still not too high


The almost EUR 13 billion called down from the credit facility of approx. EUR 20 billion directly contribute to the financing of the debt; furthermore, the satisfaction of the conditions set by the lender organizations and checked and acknowledged by international institutions also contributed to the strengthening of confidence in the country.

The government has approved to grant loans of a combined EUR 2.4bn from the international loan package to four Hungarian banks without foreign parents -- OTP Bank, FHB, and state-owned MFB and, through MFB, to its subsidiary Eximbank -- to back their lending activities in the global liquidity squeeze. In the first part of 2009 the government approved the granting of a EUR 1.4bn loan to OTP Bank and a EUR 400m loan to FHB Bank at market rates (expiring in November 2012) as well as a loan of HUF 170bn (close to EUR 600m) to MFB. Eximbank announced in May it will take out a EUR 142m, most of it from the IMF loan through cooperation with its parent bank MFB. The FHB mortgage Bank before already received HUF 30 billion in capital increase against preference shares.


BC: What are the results of taken measures?


R. J.: Restructuring moves Hungary took will ensure a declining budget deficit and public debt from 2010. Public debt may be lowered below 60 per cent relative to GDP by 2015, due particularly to the fiscal consolidation underway while peaking undoubtedly at around 79 per cent in 2010. However public debt relative to GDP in the euro zone will make 84 per cent at the same time. The European Commission at the end of last year admitted to have assessed Hungarian fiscal outlook with too much criticism. That is, while they had first found that government deficit would make 4.1 per cent of GDP for 2009, now they see it below 3.9 per cent as originally set out. The external debt is Hungary‘s most pressing problem. In the second half of the 90s public debt has resumed and is growing since 2001 while private sector indebtedness increased importantly from 2006 on. In 2009 that external financing capacity of Hungary could be positive amid a slightly negative balance of payments as a permanent feature for the coming years since the difference between the balance of payments and financing capacity results from EU capital transfers that may increase further in the years ahead. As a result of these processes, Hungary’s external indebtedness may continuously plunge. Therefore, the package of measures placing emphasis on domestic financial equilibrium and competitiveness in export markets due to which the ratio of imports to exports significantly improved, may offer a solution to external indebtedness as most pressing problem as well. In 2010 recession of 0.3 per cent could be achieved at export growth of 5.5 per cent. Since Hungary managed to achieve export growth at a higher rate than demand for imports grew in the export markets, the shift in tax burden, lower labour cost and higher labour efficiency, e.g. improving competitiveness suggest that this forecast is reasonable.

Also, measures taken in the recent past allowed for Hungary to restore market confidence and do without drawing on IMF loans. The Hungarian minister of finance said recently in an interview “We don’t need IMF money any more and my expectation is that since Hungary is targeting the same track for the future, we won’t need financial help”. By the way Hungary has not drawn down installments due from the International Monetary Fund since September 2009.


BC: What can we wait in the near future?


R. J.: Parliamentary election is coming in spring and many think the government will be changed. But most probably the new government should follow the rules:

  • keeping the current account balance deficit under 3.0 % of GDP,
  • trying to decrease the level of the Hungary’s dept,
  • trying to reduce the unemployment rate,
  • attracting foreign direct investments,
  • boosting the export.


The euro-goal will be one of the most important priorities of the next government. In order to get it in 2015 (or maybe in 2014) other unpleasant restrictions are still needed. While the postponed investment and development projects helped obviously the short-term savings in the crisis period, serious and profound reforms has not been started yet and for such a reforms there has been no time and mandate of the current government of experts.


In the near future Hungary has an urgent need for solving problems like restructuring of the social system, restraint on public sector expenditures, sustainable pension system, controlled financing in healthcare, Roma integration, easing of state-distribution, competitive education system, diminishing corruption. And only a consistent and effective reform-package should result in long-term, sustainable and structural savings for government budget, for competitiveness of economy and for safe and prosperous life of the population.

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