Paying Off Forex Loans, The Hungarian Way

It is hard to write anything new on the Hungarian government’s plan to fix the exchange rate for loans held by the Hungarian population in foreign currency at as much as 20% below the prevailing exchange rate. I am perhaps even more drawn to the mystery of why on earth one might think this a good idea than to reiterating the hundreds of different arguments establishing the contrary. Approaching the issue from this perspective, what is immediately apparent is that if it is a good (or decent) idea, it should be conceived of not as an economic, but as a political initiative. But even as a political move, what could possibly be the appeal of the idea?

Forex Loans

It is a dilemma with which those browsing the more commercial domains of the Hungarian internet are thoroughly familiar: looking for loans in Hungary, one speculates a lot before choosing the currency of the loan. Over the years, the Hungarian currency was the less favored of the many options, because the Hungarian currency is struggling with high rates of inflation. If you wanted your loan in Hungarian forint (from here on: HUF), you therefore had to pay exorbitant interest charges.

In comparison with loans in the domestic currency, as far as interest rates were concerned, forex loans (which are loans made in a currency other than the one in which one usually operates) were practically free. At one point, for example, loans originated in Swiss franc were offered at a 3% interest rate. The forex loans offered in the Hungarian banking market were not “covered,” however, by guarantees that the borrower can exchange currency at the same rate at which the loan was converted into HUF. In this way borrowing foreign currency included the risk of facing higher monthly payments (as well as the possibility of paying less in the unlikely instance that the exchange rate turned more favorable).

Between the guaranteed high interest to be paid on HUF loans, and the less foreseeable risks of tying one’s monthly payments to the ups and downs of a foreign currency, it is no surprise that many Hungarians chose to take out forex loans. It is estimated that 287,000 households – approximately 1.2 million individuals – hold a total of 5000 billion HUF worth of loans in foreign currency. In the meantime, with the US economy in recession and the EU-zone continually ensnarled by the threat of collapse, the Swiss franc – the foreign currency most favored by Hungarians – grew too strong. So strong, in fact, that some Hungarians now pay twice as much for their monthly payment as they did at the time of taking out their loans.

Forex loans, however, do not only bear down on 1 out of 10 individuals in the country – they pose a macroeconomic challenge as well. It would be in the Hungarian economy’s best interest to allow the forint to get weaker: this would increase the competitiveness of Hungarian enterprises abroad and stimulate the domestic economy. Nothing of this sort is feasible to pursue, however, for as long as so many people were in need of sheltering from the rise of their forex loan payments.

It is therefore extraordinarily important for Hungary to figure out a way to convert the Forex loans held by its population into forint loans – this is not a misguided conclusion by any means. But enter here the “Hungarian” way, the Hungarian government’s unique solution to this problem.

The Hungarian Government’s Way

On Sept, 12, the Hungarian government officially introduced a proposal that would encourage individuals to repay their forex loans. The measure would unilaterally override the private contract between loaner and borrower so that anybody who wished to make a one-time repayment of the full loan amount could do so at 180 forint to franc (current rate: 236 forint to 1 franc), 250 forint to euro (current rate: 286), or 2 forint to yen (current rate: 2.8). Repaying debts under these circumstances could amount to as much as a 28.5% forgiveness on their loans.

In other words, the government’s solution would be to defer any cost associated with the repayment of forex loans in their entirety to the loaning institutions, of which only two are Hungarian-owned. The rest of them vowed to fight the proposal at the courts, asking the European Union to issue an injunction against the measure once it is voted into law (which as of now is scheduled for sometime during the middle of next week).

The idea, of course, would not withstand a legal challenge. Not only is this act of government illegal, the Hungarian government is fully aware that it is illegal – it had possession of the legal opinion of its own Ministry of Justice on the very day on which the first, unofficial announcement of the plan had been made. This makes it likely that, when the measure is found illegal by the courts, the Hungarian state is going to be required to pay reparations to the banks. The bailout of the forex loan holders therefore will eventually be paid for by every single taxpayer of the country. There are other ways in which practically everybody in Hungary will be negatively affected by the consequences. For example, the measure will also likely to freeze up the availability of credit on the Hungarian money markets, which, if the global recession is a fair indicator, constitutes the most certain way there is of pushing an economy into a depression.

Given these costs to the average Hungarian, it is not at all negligible that only a very select circle would profit from the proposal. It is estimated that not more than 1 out of 10 of these loans would be paid off under these terms.

Those who have enough savings will likely avail themselves to the opportunity. Those who do not have the full amount in savings might take out a HUF loan, but it is not yet clear how eager banks are going to be to provide such loans and what kind of surcharges they might impose (especially because, by granting these loans, they would create a loss for themselves on the repayment of the forex loan). But even if such products were widely available, only the most economically stable could make use of them. For example, only loans in the amount of less than 75% of real estate property qualify for HUF loans (and no real estate worth more than 30 million HUF could qualify as collateral for these loans). This means that even those in the higher echelons of society might not be able to meet this requirement. As many forex loans required no more than 10 or 20% self-financing, quite a few of these mortgages are in the red at this current, higher exchange rates, i.e. the amount a borrower now owes on them might be considerably higher than the original mortgage amount.

As more and more details of the plan are announced, we are also learning that many would be automatically excluded from the program. No one whose loans originated at rates higher than the fixed rate would be eligible, nor can members of the parliament take advantage of this option. Those facing evictions are already on what is called the “BAR” list: they are ineligible for further bank transactions. So while the plan is a fantastic opportunity for the Hungarian nouveau riche, it does nothing to help families struggling to make payments on their loans. As economic policy, this proposal is in fact so unsound that it assumes as a given what it was supposed to bring about by its design – that people have the financial means to untangle themselves from their debts. Which is why there is reason to discuss it as a political measure coded for consumption by the government’s remaining supporters, rather than as the debacle it is becoming for the Hungarian economy and for the country’s international relations.

The Injustices of Banking

For the supporters of the government (who remain strong: 59% of the Hungarian voters, according to a poll from early September) forex loans are not about the economy, but about a grave injustice. I am no fan of banks myself, but I see an ethical principle in repaying what was loaned to me, and in following up on my obligations as promised. I am not sure whether the government’s voting base sees the matter in these terms. For them, loaning in foreign currency constitutes an injustice. If I am not mistaken, they would also think that collecting an interest rate on a loan is an injustice. What is more, they seem to think that making a living off of collecting such an interest rate – being a bank, in other words – is an injustice. Without a doubt, therefore, to return an injustice with another as the Hungarian government does – to force these banks to swallow these losses by political force – is the greatest form of justice, and the best use of government. In its importance, it might even override the costs and the consequences of the program, as well as the lost opportunities to formulate an economic policy that would in fact help the economy.

At the very least, it seemed to me that only these sentiments gave coherence to an otherwise rambling statement in which Prime Minister Viktor Orbán announced to the parliament the state-sponsored forex loan repayment program. The proposal itself was cushioned with care: though the rest of the items on the list were no doubt secondary in comparison to it, the plan was announced as the fourth in a series of six ideas that together comprised the “country’s defense plan.” This list of items, however, did not make as much sense as Orbán’s stern identification of a series of enemies against whom his defense plan would deliver the Hungarian population.

Prime Minister Viktor Orbán delivers his "Country Defense Speech" to the Hungarian parliament on September 12, 2011. Those from whom the plan guards are: usurists, financial speculators, banks loaning in foreign currencies and the Socialist Party (this image is the official illustration used on http://www.orbanviktor.hu)

In this dimension of the speech’s rhetoric, Orbán’s presentation defined the following series of enemies: usury, financial speculation, banks lending in foreign currency and the previously ruling socialist government. Lesser mentioned – because it amounts to putting the same kind of political scaffolding on another grave economic problem of the country, its national debt – is the fact that on the same day on which announcement of the plan was made, the Hungarian parliament also suspended the immunity of former Prime Minister Ferenc Gyurcsány. He is likely to face charges in relation to irresponsibly pushing the country into indebtedness during his term.

But we must remain with the idea that forex loans are an injustice and the tacit implication of this tenet: namely that, if forex loans are an injustice, just is the one who defends the country from having to pay them off. This medieval crusader logic might be hazy, but in my opinion it is intentionally so. Either you get it, or you don’t – in which case you probably did not need to get it to begin with.

Mr. Orbán’s counterparts on the far-right are much more explicit not only about holding these ethical convictions, but about the nationalistic paranoia that serves as their context. If you ask Jobbik and its voters, foreign banks in Hungary are colonizers interested in buying off the country. Because of the losses suffered during the recession, banks are now desperate to “syphon away” the wealth of the Hungarian people and to replace the losses suffered in their home-country by the gains made in Hungary. In the US, frustration about bailouts also resulted in anti-banker sentiment ripe for populist demagoguery. But in Hungary a mixture of xenophobia, anti-semitism and national self-importance transforms the same sentiments. Eventually, they culminate in the belief that Hungarians are so exceptionally exploited and abused by the West that they are entitled to special arrangements such as this proposal.

Nevermind if you don’t have the means to make use of it – at least there is now a theoretical possibility to stick it to the West via this proposal. Nevermind that the real problem is that only a select few will have enough money to make good of this meagre economic solution. As long as it gives the right answer to the exploiters and the parasites, nevermind the part where the government keeps talking to hallucinated enemies of the country instead of addressing real problems.

Gábor Vona, party chairman of the far-right party Jobbik, was in fact helpful enough to specify what the justice of banking would look like for his voters. In his response to the speech detailing Hungary’s new national defense plans, he called Mr. Orbán a coward and a banker (auch!) for not going far enough in his proposal. The far-right thinks that justice will be served only on the day on which forex loans are paid off at exactly the rate at which they originated – be that 160, or even 150 HUF to Swiss franc. What outstanding earnestness – or simple-mindedness? Let’s suppose that I got strawberries in early June for the low price of 200 forints a kilo. Would it be just for me to walk out of a store in late December paying only 200 forints on the pretext that the store is engaged in deviousness and capitalistic conspiracy?

Forex loans, in the end, are not at all about the economy, for which the proposal would make only the slightest of dents. They are not about those struggling from loan payments during the recession – whose plight apparently goes unnoticed by the Hungarian government. This affair is about moral reasoning, and about the inability to go beyond one’s most direct  self-interest. It is symbolic of a level of immaturity at which one does not yet find it possible to think in terms of society-wide ethical norms and to thereby be a productive participant of a community. In this respect, the difference between Mr. Vona and Mr. Orbán is negligible.

Words Do Matter

There are differences in style among these two: while the leader of the far-right prefers simplicity, even at the cost of exposing the flaws of his own logic, Hungary’s Prime Minister typically operates with the underhanded rhetorical appeal of the recolor. There are plenty of other words to capture the problem of forex loans. How about, say, sad, regrettable, unfortunate, unwarranted, unfair or inequitable, just to begin with? There, there are at least six shades of the grey, a vocabulary that could start us off talking meaningfully about this problem.

But Mr. Orbán is more successful with his own brand of state-sponsored nationalism because he recasts social reality in its component colors. Where Mr. Vona uses the violence of his rhetoric to reduce this wide area of grey into black and white, the Prime Minister encourages a kind of moral intoxication in which really all we need to know is that black is opposed to white. This is how we end up with a sparsity of our vocabulary, which already foreshadows that narrowness of the sphere of action that individuals may discern as available to them. A social problem which is complex and difficult, which is continually felt on a personal level but which stems from determinately impersonal causes, is thus lost to sight.

From where Mr. Orbán currently stands, this blurry-eyed sentimentalism and this low level of ethicality is important to cultivate in the citizenry. There are hard and fast political interests at stake: this government is now engaged in an all-or-nothing gamble. Corrupt a society and its ethical principles any further, and the crusaders of justice will be able to impose themselves as the country’s omnipotent ruler. Otherwise, they might just have to settle for being the darkest shame in the country’s modern history.