October 8, 2024

Hungary, Once a Star, Loses Its Shine

BUDAPEST — Zoltan Zsoter, an 80-year-old retiree, would seem to be about as far from the world of currency speculation that a person can get. Yet he is an example of how the workings of the global financial system, amplified by the policies of a single political leader, can have a devastating effect on ordinary people.

Mr. Zsoter is one of hundreds of thousands of Hungarians who took out home loans that must be repaid in Swiss francs or other foreign currencies like the euro. Such loans offered seductively low interest rates when times were good. But then the Hungarian currency plunged, causing Mr. Zsoter’s monthly payment to almost double.

“I live day to day,” Mr. Zsoter said. After defaulting on his loan, he pays 40,000 forints out of his monthly pension of 51,000 forints, or about $210, to stay in his modest Budapest apartment as a renter. “Sometimes I have to choose between buying either food or medicine,” he said.

Hungary serves as a cautionary tale for those who argue that Greece could regain competitiveness by reintroducing its currency. The drachma would plunge against the euro, the theory goes, and allow Greek products to compete on price with countries like Turkey.

“Whatever you win today, it shoots you back tomorrow,” said Radovan Jelasity, chief of the Hungarian unit of Erste Bank, an Austrian institution.

Viktor Orban, the embattled Hungarian prime minister, did not create the problem with foreign currency loans, which is also an issue in other East European countries like Poland.

But many critics regard Mr. Orban as a would-be strongman whose erratic, heavy-handed policies have made Hungary’s economic problems far worse by scaring off foreign investors, prompting credit rating agencies to downgrade government bonds to junk and leading to an even further drop in the forint.

In theory, the plunge of the currency should help the economy by making Hungarian products less expensive abroad and cutting the cost of labor relative to neighboring countries.

But economists and business people say the advantages of a weak currency are more than canceled out by negative factors, like soaring prices for imported fuel or imported components for Hungarian factories, not to mention higher payments on foreign currency loans.

Peter Oszko, who was finance minister in the caretaker government that preceded the election of Mr. Orban in 2010, pointed out that the Hungarian economy was by many measures in reasonably good shape. It has a trade surplus and its debt, equal to 81 percent of gross domestic product, is in line with the European Union average, though high for a developing country.

But the economic climate is grim, with 10.7 percent unemployment and inflation of 4.3 percent even as the economy heads into recession. Hungary is highly susceptible to the economic problems in Western Europe, where most exports go.

To some critics, the biggest problem with the Hungarian economy is Mr. Orban himself. “The fundamental numbers are good,” said Mr. Oszko, who now runs a venture capital fund. “If the government decided to become more credible and predictable, it would help a lot.”

Backed by a two-thirds majority in Parliament, Mr. Orban has passed a flurry of laws that have concentrated power in his hands, weakened competing institutions like the central bank and alienated international lenders as well as an increasing number of Hungarians.

One law nationalized private pensions in order to make the budget deficit look better. Such actions last week prompted the European Commission to threaten to take legal action against Hungary, a move many Hungarians regarded as long overdue.

Mr. Orban also faces pressure from the International Monetary Fund, which may be Hungary’s only hope to avoid defaulting on its national debt, much of which is also denominated in euros.

Faced with rising borrowing costs, the country could run out of money by May or sooner if bond investors become more skeptical. Yields on longer-term Hungarian bonds rose above 10 percent this month, a rate that bodes ill for the government as it seeks to sell more than $1 billion in debt through April, a large sum for a country of 10 million people.

Following a visit to Washington last week by Tamas Fellegi, a Hungarian minister, Christine Lagarde, the I.M.F. managing director, made it clear she wanted to see action and not promises.

Article source: http://www.nytimes.com/2012/01/17/business/global/17iht-hungary17.html?partner=rss&emc=rss