By FLOYD NORRIS
Published: September 29, 2011Homeowners took risks in 2005 and 2006 that came to seem foolish, if not reckless, and wound up with mortgages they could not afford. Some blamed the banks for luring them into taking the risks. The banks offered some modifications, but said they believed it was the homeowner who should suffer for gambling and losing.
Prime Minister Viktor Orban said Hungary would take “suitable countermeasures” to defend its policies against critics.
So it was in the United States. To allow people to buy homes they really could not afford, banks offered mortgages with artificially low monthly payments in the early years. When home prices fell, the mortgages blew up.
So, too, it was in Hungary, where home mortgages were relatively rare until the banks made it possible for buyers to avoid high interest rates, but with a big risk.
Mortgages denominated in foreign currencies became wildly popular, because that way borrowers could get low interest rates, and thus afford to buy homes that would otherwise be out of reach. But then the local currency, the Hungarian forint, plunged in value, and homeowners faced rapidly rising monthly payments. They owed more forints than they had borrowed.
In the United States, the sanctity of contracts has generally prevailed. The banks have been forced to pay multibillion-dollar penalties for bad behavior, but that does little for the anguished homeowners.
In Hungary, the populist government has decided it is the banks — mostly foreign-owned — that should suffer. Under a new law, signed by Hungary’s president this week, persons with loans denominated in Swiss francs can pay them off using an exchange rate of 180 Hungarian forints to the franc — about a 25 percent discount to the current market rate of almost 240 forints. There are similar bargains offered on loans denominated in euros and Japanese yen.
It is not clear how much this will really help homeowners. Few of them have the money on hand to pay back their loans, and to get the money they presumably would have to borrow from banks. Andras Simor, the governor of Hungary’s central bank, estimates that only one-fifth of borrowers will be able to take part.
The move has outraged the financial establishment of Europe. It represents a serious breach to the patterns followed in much of the world since the financial crisis burst open three years ago. Banks have lost a lot of money, and been bailed out, but bank executives have done quite well. Those who lent money to banks have generally gotten all their money back. Customers by and large have been forced to bear the brunt of their behavior, whether or not there was evidence the banks had misled them.
In Hungary, the lure of foreign currency loans back in 2005 was clear. Interest rates on mortgages denominated in Swiss francs were around 4 percent, while rates on forint loans could be in the double digits. Thanks to the lower monthly payments, a buyer could qualify for a Swiss franc loan who could not hope to get a loan in local currency. Soon a vast majority of mortgage loans were made in Swiss francs.
The risk was obvious. All the borrowers had income in forints, not francs. If the forint lost value, their loan payments could multiply.
Now the government claims that banks misled borrowers. The extent to which that is true is hard to gauge. But there is no doubt that a widely voiced theory was that because Hungary was a growing economy, its currency should appreciate against the staid old currencies of Western Europe. And that is exactly what happened in the years running up to the credit crisis. Those who failed to take out mortgages in Swiss francs or euros looked foolish.
When the forint began to lose value, banks did try to ameliorate the situation. In 2009, they offered to extend loan periods, so that homeowners could make lower monthly payments that would last for more years.
Earlier this year, with the forint around 220 to the franc, the banks came up with a plan that was reminiscent of the pay-option loans that helped to create the American financial mess. Borrowers could choose to make payments as if the forint were at 180 to the franc, and continue to do that through 2014. That would leave many with manageable payments, since most of the loans were taken out at exchange rates from 140 to 180 forints to the franc.
The savings from those lower payments would, however, simply be added to the principal of the loan. It was negative amortization, likely to postpone the pain but not alleviate it.
The Hungarian government, elected in 2010, has done a lot of things that upset others in Europe. It passed a media law that seemed aimed at silencing critics. It walked away from an agreement with the International Monetary Fund, choosing to seek fiscal stimulus rather than reduce deficits, as the previous government had promised to do after it was bailed out in 2008. The prime minister, Viktor Orban, blamed the central bank for the country’s fiscal problems and cut the salary of its governor, Mr. Simor, by 75 percent.
Now it has gone after the banks.
Much of the Hungarian banking system is owned by Austrian banks, and Austria’s finance minister, Maria Fekter, is reported by the Austrian business newspaper Wirtschaftsblatt to have sent a letter to Hungarian officials saying the new law violated “all expectations an investor can have in a functioning market economy and democracy.”
Similar sentiments were voiced by Josef Christl, a former executive director of Austria’s central bank, who is now an economics professor and a consultant to banks, including Erste Bank, Austria’s largest and a major player in the Hungarian market.
“It is a serious violation of existing laws,” he told me, pointing to European laws barring discrimination against companies from other countries. But there are Hungarian-owned banks, and they seem to be treated equally badly.
Mr. Christl said the law itself had helped to depress the value of the forint by raising fears about the government’s economic policies. He said that had made the situation worse for borrowers, and he was dismissive of the country’s economic record. “Hungary is an underperformer with respect to growth and an overperformer with respect to debt,” he said.
The rating agencies voiced alarm. Fitch said the law had set a “dangerous precedent.” Moody’s called it a “worrying precedent.” In several other Eastern European countries, foreign-currency mortgages have turned into disasters.
At a news conference, the Hungarian central bank governor, Mr. Simor, said the move would “weaken credit institutions’ ability to support economic growth by extending credit. And that in turn will lead to a deterioration in Hungary’s growth prospects and generate lower revenue for the government budget.”
It is far from clear that the Hungarian government can make the law stick. There are issues of European and Hungarian law, and there is the fact that Hungary, like many other governments, needs access to the international capital markets.
Even if the law does go into force, it would hardly be surprising to see the banks refuse to make new loans to enable borrowers to pay off old loans at a discount.
Speaking in Parliament earlier this month, the prime minister, Mr. Orban, said he “expected that international organizations will attack us in international forums.” He said that “in case of unfavorable judgments, we will react with suitable countermeasures.” He did not say what those might be.
But even if Hungary is slapped down, Mr. Orban has captured an antibank and antifinancier spirit that is much more widespread.
“It is time for the financial sector to make a contribution back to society,” said José Manuel Barroso, the European Commission president, as he proposed this week a tax on financial transactions.
The banks say that would be counterproductive and would drive trading to the United States, and they will probably prevail in the end, since the British government agrees. Do not be surprised if the debate on the proposal includes references to Jesus driving the money changers out of the temple.
When Angela Merkel, the German chancellor, met with Pope Benedict in Germany last week, she chose to highlight concerns over just where power resides.
“We spoke about the financial markets and the fact that politicians should have the power to make policy for the people and not be driven by the markets,” The Financial Times quoted her as saying after the meeting. “This is a very, very big task in today’s time of globalization.”Floyd Norris comments on finance and the economy at nytimes.com/economix.
A version of this article appeared in print on September 30, 2011, on page B1 of the New York edition with the headline: Hungary Blames The Banks http://www.nytimes.com/2011/09/30/business/global/hungary-blames-the-banks-in-its-mortgage-crisis.html?pagewanted=all&_r=0