Seeking a way out

Commentators, including right-wing business analysts, find few kind words for  a planned legislation, which would allow individuals who are heavily indebted in foreign currencies to pay off their mortgages at much improved exchange rates. The government’s idea to introduce a new luxury tax is received more kindly, although it will have to be approved by the European Union before it can be implemented.

Hungary’s debt problem is a special one in today’s global debt crisis in that both households and the government are heavily indebted in foreign currencies. (See BudaPost, August 13) As a side-effect of the crisis, the Forint has been losing ground against the Euro and the Swiss Franc, making debt servicing increasingly burdensome. At their three-day meeting before the start of the autumn session of Parliament, MPs of the two governing conservative parties (Fidesz and KDNP) approved a scheme whereby debtors can repay their debts in one lump sum, at a rate of 180 HUF to 1 Swiss Frank (instead of the current rate of 232).On Sunday ,the Minister of the Economy was mandated by the government to negotiate the details with the representatives of the Banking Association..

Writing in Népszabadság, Róbert Friss recalls that the banks have already been paying a special tax amounting to a yearly HUF 500 billion since last summer, and are also the target of populist verbal attacks which grow ever sharper. Money is already tight, and credit might virtually disappear from the economy if the banks are paralysed. Unemployment will then surge even higher, and even more debtors will be unable to pay the interest due – the left wing commentator warns.

Csaba Szajlai, Magyar Hírlap’s leading business analyst, admits that the re-payment scheme is a rational one – in political terms. 1,2 million households (representing over a third of the population) owe the equivalent of 6000 billion Forints (over one fifth of GDP) to the banks. It is in everybody’s interest that those debtors should not default. “This government has at least realised the gravity of the problem, even if has been somewhat late in doing so,” – Szajlai writes. His problem with the plan is that it appears to suit that part of the population who could continue to service their debts. The rest could hardly find  – or borrow – the money necessary to pay off the debt, even at the lowest exchange rate. “The parties have been blaming each other for years for this situation, and now the government has finally intervened. But it should have consulted the banks: Hungary’s credit supply depends on them.”

The government is certainly not in a position to bail out the debtors, because it too is deep in debt. In fact, Prime Minister Orbán informed first the cabinet, then his MPs that the public deficit must be kept below 3 per cent, otherwise the debt will slowly become unserviceable. The growth rate and consequently budget receipts are well below expectations, and this has triggered an improvised 100 billion Forint package which combines cuts in expenditures and increases in taxes. (See BudaPost, September 8.)

Tamás Mellár, a professor of economics at Pécs University and a critical supporter of the conservative government, believes these measures were only intended to show investors that the government is ready to intervene whenever unexpected problems arise. In his column in Világgazdaság, he contends that this year’s planned deficit is not in danger, as the assets syphoned off from compulsory private pension funds can fill any possible budget vacuum. Nevertheless, Professor Mellár does not believe that the drastic increase in VAT receipts and the equally drastic spending cuts will work. But his main concern is what measures will be taken to avoid a large public deficit next year. The government has already seen a first version of the 2012 budget, but no figures have been released so far – except the deficit ratio: 2,8 per cent of  GDP.

Magyar Nemzet, the main pro-government daily has joined the chorus of voices criticising the flat income tax introduced last summer, and personally upheld by the prime minister despite a storm of criticism. In an editorial discussing the country’s financial difficulties, Matild Torkos acknowledges that the government has far fewer resources at its disposal than its predecessors, as there is practically no more public property to be sold, while there is much more debt to be paid back. But she describes the flat tax as a drain on the budget, down which hundreds of billions of Forints pour each year. “However, the present government has carved the flat tax into stone. To ask for it to be reconsidered amounts to lèse majesté nowadays.” The only remaining hope is a fresh proposal from the Minister of Economy György Matolcsy to impose a 35 per cent tax on luxury items. The idea has been submitted to Brussels and “we can only hope the European Union will soon realise the necessity to tax the consumption of the wealthy, in a spirit of social justice.”

Tags: debt, Fidesz, Orbán, Swiss Franc