The saga of the conversion
of fx-loans in Hungary goes on. According to a report at the
Hungarian website origo.hu the government's main aim is to regain
freedom of exchange rate determination and practically carry out a
devaluation of the forint, without hurting households with fx-loans.
As I'm no friend of this government I'm sceptical a bit, no
government politician or supporter used this argumentation until
today. However, if it is true it is just an even stronger proof of
the incompetence of the government.
I know that I was arguing
– not that it would matter the slightest – on behalf of external
devaluation, therefore to declare a seemingly identical argumentation
could seem paradox. Nonetheless, it is hard to treat the government's
proposal as fulfilling the three necessary preconditions of a
successful devaluation through the conversion of fx-loans. Any
attempt should be comprehensive in its extent, prompt in its
execution and orderly regarding the covering of losses and managing
the inevitable risks. In this case none of the above preconditions
exists.
The volume of fx-loans is
around 1 million households. The ration of non-performing loans is
around 10%. The proposal of the government intends to cover only 300
000 at best, so, the remaining 700 000 would still make a very
significant electoral base not to let the forint devalue. And this is
the maximal number the government claims will have an opportunity to
make the conversion. The Minister of National Economy allegedly
argued that only 50 or 100 billion HUF loss will be incurred to the
banks, a sum that gives only about 75 000 existing loans converted.
Hardly a reduction enabling the government to devalue.
Neither is the proposal
prompt enough to make a sufficient reduction for a quick devaluation.
Although the prime minister told yesterday that only a limited time
frame would be allowed to the debtors to make the conversion (a
solution with many – albeit very different – risks), this evening
the reports states that the possibility will be open indefinitely.
So, even with the compulsory lending of forint based loans prescribed
for the banks the process would be slow (given the practical and
procedural necessities, finding the suitable new loan, preparing the
documentation etc.) and without it it will only be a cherry picking
of the better debtors. Meanwhile everyone will avoid the not so
promising clients, effectively reducing the number of conversions and
therefore postponing the restoration of freedom of exchange rate
manipulation. With the process underway for months or probably even
for years the economy can not have the boost hoped from the
devaluation.
It is again hardly an
orderly solution. Although the distribution of the losses is clearly
settled at least for the time being* nothing else seems to be in
place to impede the dangerous process induced by the conversion.
First of all there could be a long period of risen demand for forint
that will inevitably lead to higher interest rates, while the
exchange rate will be depressed (but probably not depressed enough to
lift the exports significantly) to compel the National Bank to raise
its policy rate and simultaneously inflating the country's foreign
currency denominated sovereign debt. Even at the present rate of
286-287 forint for one euro the debt grew with 800 billion forint,
26+ of the amount the government reduced it back in summer. It would
effectively mean the end of the debt reduction course, up to this
moment the main objective of government policy.**
Beyond the practical
issues the new strategy (external devaluation) is the third one in 16
months. Initially there was an attempt for a stimulus through tax
cuts that almost immediately failed due to policy constraints. The EU
forbade any deviation form the agreed deficit target of 3,8% of GDP.
During the autumn the government made an experiment with classic
austerity and tax cuts, but the budget collapsed already in January,
leading to the very typical austerity program (internal devaluation),
the Széll Kálmán plan and the primary objective of forced and fast
debt reduction. And now the government turned around again, this time
opting for external devaluation. Albeit not in a very sensitive way.
(It is worth to take a look at what happened in Iceland, where –
with the assistance of the IMF – a consolidation program based on
external devaluation was carried out successfully. It needed far more
and far stronger cooperation and effort than the Hungarian government
envisages.) And not only the sudden and unexpected turns and twists
speak fro themselves, there are a lot of contradiction between these
strategies. Austerity is the opposite of the stimulus, while external
and internal devaluations are hardly reconcilable and the former will
initially raise the debt to GDP ratio. A sensitive mixture of these
approaches would still be possible (especially of the first and the
third), but it would need a more complex and sensible approach, one
that calculates with every possible effect and takes into account
every potential risk. Unfortunately the only economic quality the
government seems to possesses is a very high marginal propensity for
gambling.
* However, the prime
minister admitted yesterday that the EU Court would most probably
declare the move illegal, order compensation and fine Hungary, but he
was eager to assure the people that they do not need to fear, the
state will take this burden.
** There are a numerous
other risks. For example the conversion means the liquidation of
Hungarian assets and payment of huge sums to foreign creditors.
Reducing national wealth and handing it over to foreigners, a
reduction of the capital and with it the possible base of investment,
and obviously will have a negative impact on the current account.
