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Image for Hungary: From goulash communism to mortages in swiss francs 

Hungary: From goulash communism to mortages in swiss francs 

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PoliticsEU-in-Motion: BudapestEU in Motion

After a decade-long tran­si­tion from a rel­a­tively mild com­mu­nist model to a cap­i­tal­ist democ­racy and tight bud­getary mea­sures by the gov­ern­ment, the Hun­gar­ian econ­omy began to flour­ish. How­ever, this eco­nomic bo­nanza was short-lived as pub­lic debt began to mount, forc­ing thou­sands of fam­i­lies to gam­ble their homes by tak­ing out mort­gages in for­eign cur­rency. 

Perhaps the old rick­ety So­viet train still car­ry­ing pas­sen­gers through metro line three to the very heart of Budapest, the cap­i­tal of Hun­gary, is the first thing to amaze the un­aware vis­i­tor. Along the whole trip, Hun­dreds of ad­ver­tis­ments now fill­ the space of old po­lit­i­cal pro­pa­ganda along the entire trip, to re­mind new­com­ers of the nearly quar­ter of cen­tury that has passed since the fall of Winston Churchill's Iron Cur­tain and the pe­cu­liar form of Hun­gar­ian so­cial­ist state: goulash com­mu­nism.

"We were the hap­pi­est bar­rack in the so­cial­ist camp" says Pro­fes­sor Sándor Gyula Nagy, an ex­pert in Eu­ro­pean Stud­ies and Vice Dean of Aca­d­e­mic and Eco­nomic Af­fairs at Corv­i­nus Uni­ver­sity. Eco­nom­i­cally speak­ing, the Hun­gar­ian model was a lot like the tra­di­tional dish: it had plenty of in­gre­di­ents. Ac­cess to con­sumer goods was re­garded as im­por­tant and the sys­tem made a great ef­fort to in­te­grate some mar­ket-based mech­a­nisms into the planned foun­da­tions of the economy. Small pri­vate busi­nesses were al­lowed in the ser­vice sec­tor, for­eign trade was stim­u­lated and ex­ports on both sides of the cur­tain in­creased. 

But when the Berlin Wall fell, the rub­ble reached here, too. Hun­gary lost 70% of its ex­ports and un­em­ploy­ment sky­rock­eted to 12% in only one year. The wreck of the in­dus­trial fab­ric fos­tered a very sig­nif­i­cant fall in GDP, the prices of basic necessities rose quickly as sub­si­dies were with­drawn and many peo­ple found them­selves in dire straits. "The gov­ern­ment un­der­took the mar­ket re­form by dereg­u­lat­ing state com­pa­nies, with some signs of cor­rup­tion. But most of all, they needed to fight the ex­ter­nal debt that was very high" Nagy explains.

Tran­si­tion, deregulation...shock!

Con­ser­v­a­tive Prime Minister József An­tall began a tran­si­tion and tough ad­just­ment pro­gramme that was to be applied by the next two gov­ern­ments. The first, headed by Gyula Horn — who led the con­ver­sion of the sin­gle party system into a west­ern so­cial-de­mo­c­ra­tic one — deep­ened aus­ter­ity through the Bokros Pack­age, under the su­per­vi­sion of the IMF. "It con­sisted of shock doc­trine above all," says Nagy. Der­reg­u­la­ton ac­cel­er­ated, aca­d­e­mic taxes were in­to­duced, there were so­cial bugdet cuts, cur­rency de­val­u­a­tion and gen­eral loss of in­come. It was the most dras­tic pro­gramme ever ap­plied in Hun­gary.

The right wing, most re­cently tied to cur­rent Prime Min­is­ter Vik­tor Orbán, made its best of the enor­mous im­pop­u­lar­ity of the pack­age and came into power in 1998. But a­part from tear­ing down the less pop­u­lar though eco­nom­i­cally ir­rel­e­vant mea­sures, Orbán did noth­ing but keep the mas­ter lines of the pre­vi­ous ad­min­is­tra­tion in­tact. With ifs and buts, the Hun­gar­ian econ­omy was grow­ing for the first time and it started at­tract­ing for­eign in­vest­ments.

So, when the first Orbán ad­min­is­tra­tion sank in the 2002 elec­tions amid ac­cu­sa­tions of power con­cen­tra­tion and cor­rup­tion, Hun­gary had re­paid a sig­nif­i­cant part of its debt, re­duced in­fla­tion and was grow­ing at a sus­tained rate. The So­cial­ists re­gained power in a mo­ment of good per­spec­tives, both po­lit­i­cally and eco­nom­i­cally. The ac­ces­sion to the EU was to take place only two years later and the adop­tion of the sin­gle cur­rency was fore­seen as a mere for­mal­ity to have been com­pleted as early as 2008. The coun­try was doing good.

Mortgages in Swiss Francs: it didn't seem as bad back then

Then, some­thing in­cred­i­ble hap­pened. In 2003, the emerg­ing mid­dle class started tak­ing out loans in euros. "It all started in an Aus­trian bank," re­calls Gabor Sziegel, for­mer se­nior econ­o­mist at the Na­tional Bank of Hun­gary and now a con­sul­tant. "In­ter­est rates in euros were around 4% while they were at around 10% in forints. Some­body thought it was a good idea to sell them [loans] to Hun­gar­ian clients. In the beginning, to buy cars; then, they switched to mort­gages."

From 2004 until the out­break of the global cri­sis, the Swiss franc re­placed the euro in the mort­gage and credit busi­ness. "The ex­change rate with the forint was con­ve­nient, the profit mar­gin was higher and some­one de­cided that it was a good idea to take the risk," ex­plains Sziegel. So that's how thou­sands of fam­i­lies — 10% of the total pop­u­la­tion — de­cided to take the great leap: buy the car, go for some pretty lit­tle things or fi­nally get out of the Soviet-era concrete blocks of flats (known as panelhaz in Hungary — Ed.). But the cri­sis top­pled plans to enter the eu­ro­zone. In the mean­time, the So­cial­ists had significantly raised pub­lic spend­ing, en­cour­aged by good eco­nomic times, and the coun­try became heavily in debt again.

The re­turn of aus­ter­ity poli­cies after the scan­dal caused by the So­cial­ist Prime Minister Fer­enc Gyurcsány's off-the-record de­c­la­ra­tions, where he ad­mited to hav­ing lied to win the elec­tions, was a hard blow to the fam­i­lies af­fected by loans in  for­eign cur­rency. The sub­se­quent de­val­u­a­tion of the forint dou­bled their debt, mak­ing it im­pos­si­ble to as­sume for the vast ma­jor­ity of them — even harder in a coun­try with an av­er­age monthly salary of 350 euros. The para­dox is ob­vi­ous. De­spite con­trolling the mon­e­tary pol­icy, the ben­e­fits of the de­val­u­a­tion are di­min­ished by an im­por­tant side-ef­fect: the au­to­matic im­pov­er­ish­ment of a large amount of the pop­u­la­tion.

Now, who was re­spon­si­ble for this cat­a­stro­phe? Pro­fes­sor Nagy doesn't hesitate: "Every­body. The banks didn't ex­plain the risks, the cit­i­zens didn't con­sider them as they should and the gov­ern­ment did very lit­tle to reg­u­late this whole sit­u­a­tion." Gábor Sziegel agrees though he em­pha­sises some points: "I don't think the banks knew it was bad. The cur­rency mar­ket and specif­i­cally the Swiss franc had been sta­ble for al­most 15 years; no­body could have pre­dicted the Greek bailout would have pro­voked the aqui­si­tion of bonds in the sec­ondary mar­ket and made ex­change rates vary."

But he high­lights one es­sen­tial fact that makes this case unique. "Indeed, what was total mad­ness, and the key point, was the switch to mort­gages in Swiss francs. Be­cause with the cred­its signed in euros you could at least af­fect one of the vari­ables, that's the ex­change rate with the forint. But if you take mort­gages in Swiss francs, you're bas­ing economic choices on two types of risk that you can­not con­trol or af­fect: the fluc­tu­a­tion of the exchange rates between the franc and the euro and that of the euro versus the forint," ad­mits Sziegel. 

Europe has the key

How can this be prevented from hap­pen­ing again? It's hard, but both ex­perts share the same fundamental beliefs. Co­or­di­na­tion and mul­ti­lat­eral agree­ments are needed between EU mem­ber states. "It's not that easy to re­move this type of fi­nan­cial prod­uct from the mar­ket; the Bank of Hun­gary it­self certainly op­posed it, but could only warn people. If you ban the prod­uct on a na­tional scale, then multi­na­tional banks just move the Hun­gar­ian clients' information to their fran­chises abroad and keep sell­ing such loans. You can only pre­vent that with a com­mon macro­pru­den­tial regulation," as­sures Sziegel.

When it comes to the ad­van­tages of keep­ing na­tional cur­ren­cies, Nagy shows some scep­ti­cism. "Who­ever thinks that a small state can con­trol its econ­omy by the ex­change rate doesn't know how the world works. That's con­trolled by the mar­ket as a whole! That's why we need to work for bet­ter Eu­ro­pean in­te­gra­tion." A very pe­cu­liar les­son from a coun­try where para­dox seems to be the nat­ural state of things. Maybe that's the rea­son why the old monolith to heroes of the Red Army shares its place with a bronze statue of Ronald Reagan in Freedom Square at the heart of Budapest. An image worth the best goulash.

This article is part of a special series dedicated to Budapest and carried out in the framework of AN EU project, intiated by and supported by the European Parliament and the Hippocrène foundation.

Translated from Hungría: del comunismo goulash a las hipotecas en francos suizos