Hungary dug itself a debt hole, now it pays the piper


By Michael Roddy

INKE, Hungary, Nov 29 (Reuters) - In the past week Hungary's bonds have become junk, the forint has slumped to a near-record low against the euro and the OECD has said the economy is headed for recession next year.

Yet unlike other European capitals where economic decline has led to street protests and political upheaval, there is little visible sign of hardship in the capital Budapest, where Spanish tourist Roberto Diaz, 46, was taking coffee and cake in one of the city's atmospheric, old-world cafes.

"I cannot see the crisis, all I can see is the luxury shops and hotels," Diaz, a hotel director from Madrid, said before heading off to tour a restored art nouveau luxury hotel near the Danube River. "You don't see poverty."

Things look a lot different in Inke, 220 km (140 miles) southwest of Budapest. Here the impact of the rising cost of imports, stagnant growth, the failure to bring down unemployment and, of special concern, the overwhelming debt burden, the highest per capita in Central Europe at about $9,000 a head, comes home to roost.

Some 1,300 people live in the village which has no industry, no big employers, no large supermarkets or discount stores and only a sprawling video arcade cum bar and roadside rest area for trucks showing signs of life after 8 p.m.

Unemployment is 60 percent, and 30 percent of the population is Roma, who remain second-class citizens in Hungary despite decades of efforts to end discrimination.

Last week, to make matters worse, the only school was shut for lack of heat because the local government was 180 days overdue on its heating bill. To make up shortfalls Inke, like almost everyone and every entity in Hungary, has borrowed, but when it reached 23 million forints ($100,000), banks would lend no more, Mayor Sandor Rozsa, 58, said.

That meant the thermostat went down and the children stayed home, cut off from school-cooked food that for some is their main meal, and left to amuse themselves in dwellings ranging from modest to downright squalid.

"Things are just going to get worse, it is not going to get better, whatever they say or promise," said Tibor Bogdan, 26, cradling two bawling infant boys in his arms to calm them.

Bogdan and his four children, ranging in age from 2 to 8, live in a tiny room crammed with cribs, a bed and a small table that serves as a cooking area. The house, located on a back street, with mud for a front yard and a festering drainage ditch right outside the door, is home to 23 people.

There are eight to 10 such homes in the village, Rozsa, mayor for 14 years, said.

"If they don't take steps to drastically change things, it is over," said Bogdan, who is Roma, unemployed and gets 25,000 forints ($108) a month for himself and the same for each of his children. He said he has had to borrow 30,000 forints, to buy pharmaceuticals for two of his children who are asthmatic.

"Everybody will become so poor that it is hard to say... the situation is inhuman."

There are dozens if not hundreds of Hungarian schools - and towns - in similar straits or worse. The irony is that Inke sits atop one of the estimated 1,300 thermal springs that riddle Hungary, affording the country the luxury of its world-renowned thermal baths..

Inke's source, about a half mile from the school, was discovered in the 1960s and has almost the same level of salinity as the Dead Sea. The village has concocted plans to put up a structure at the site resembling the Pyramid of Cheops, Rozsa said, but despite investor interest from as far away as Israel, Norway and Spain, no one has come up with the money to use the hot water, which is 145 C when it reaches the surface, for a spa that would provide much-needed employment, or for heating.

With no alternative to gas heat, banks refusing to lend more and energy company e-Star demanding 3 million forints for its overdue bill, Rozsa said he had to let the company turn down the thermostat, so the system would not be damaged, and send the 124 schoolchildren, 31 nursery-care infants and 15 teachers and aides home.

The fact that a children's foundation came to the rescue and paid the bill, so the school could reopen on Tuesday, did not change Rozsa's view that the market economy that supplanted communism in 1989 had, for the week the school was shut, failed the children of Inke.

"As a private person, I would say it was safer in the previous system, and more secure but it was more unjust. But we don't have the fairest system today either, and it's also very unstable," he told Reuters in an interview.


Hungary, once the star pupil of post-communist economic and political reform in Central Europe, is nothing if not an example of instability. Not only has its debt been downgraded to junk for the first time since 1996, but its forint currency has plunged by 14 percent in value against the euro since June 30.

In part this is because of the economic chaos gripping the euro zone, but it also is due to what one credit rating agency has called the "unpredictable" policies of populist centre right Prime Minister Viktor Orban.

Orban became a household name in Hungary in 1989 when, at the reburial of Imre Nagy, who had been prime minister during the failed 1956 revolution against Soviet rule, he called for the Russian troops stationed in then-communist Hungary to go home, a brave and unprecedented clarion call to the people.

More than 20 years later, long after the collapse of communism and reincarnated as arguably Hungary's most successful post-communist politician, Orban's knack for knowing what was on the mind of the average Hungarian translated into criticising banks and Western financial institutions.

Shortly after taking office, his government announced it was breaking off a restructuring deal with the IMF, which along with the European Union injected 20 billion euros ($26 billion) into Hungary at the height of the global financial crisis in 2008 to prevent a default by the wildly unpopular Socialist government, whose former prime minister had been quoted as saying he had lied to the people about the state of the economy.

Orban's rationale was that the IMF/EU deal was too restrictive, attached too many conditions and Hungary knew better how to boost economic growth. "We are going to go our own unorthodox way," he said.

It didn't hurt his popularity within Hungary, but it did hurt Hungary's reputation in financial circles.

"I think this cuts to the heart of the problem, which is policy unpredictability," Neil Shearing, an analyst with Capital Economics in London, said in a telephone interview. "He (Orban) is a populist nationalist and there are obvious sensitivities with that kind of policy-making within Central Europe. So I think it starts to ring alarm bells."

Where Orban may have gone a step too far was in trying to alleviate the pain of hundreds of thousands of Hungarians who had taken out mortgage loans denominated in hard currencies, particularly the Swiss franc, the euro and the Japanese yen, as opposed to the weak forint, where loans were subject to relatively high interest rates.

The fact that so many people took out such loans to buy flats, houses and consumer goods was fueled by the notion that countries of the former communist bloc were going to become rich, and converge with wealthier Western Europe into one happy consumer family, analyst Gabor Orban of Aegon Fund Management in Budapest said.

"The way this was reflected in Hungarian public sentiment is very simple - we're getting richer and richer, and it can be justified that we consume more and more of our permanent income, to use a technical term. Our outlook is very bright so we might as well bring forward some of our consumption to the present," Orban said.

The flaw in this logic became apparent in 2008 when the global economic crisis hit. Hungary's economy weakened, along with its


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