Hungary’s dangerous dependence on eurozone banks

 
Hungarian parliament building

The financial crisis in Hungary is a warning of why the eurozone's debt crisis is the world's debt crisis. Hungary is not a member of the eurozone, but economic woes partly of its own making have been seriously exacerbated by the weakness of the eurozone's banks and the anxieties of eurozone investors.

The big point is that as an economy, Hungary is very dependent on credit from abroad, especially credit provided by eurozone banks. According to the latest figures from the Bank for International Settlements (which are always several months out of date by time of publication) European banks have provided $120bn of credit to Hungary's public sector and private sector, out of total international lending to Hungary of around $140bn.

To put that into context, overseas lending to Hungary represents around 100% of GDP.

So, unsurprisingly, a recent analysis by the BIS showed that Hungary is one of the emerging economies more vulnerable than most to what it calls "sudden capital withdrawals through the banking system" - because foreign banks supply four fifths of credit in the country and around half of this was delivered from outside the country rather than being funded locally by the foreign-owned banks.

Austrian banks had the biggest Hungarian exposure, with $42bn, followed by Italy with $24bn. So the supply of vital credit in this struggling economy was not helped by a stipulation last year that any new loans by Austrian banks to European countries classified like Hungary as "emerging economies" had to be matched by increases in local deposits - which effectively froze lending across the border.

But the more fundamental point is that all eurozone banks have been ordered by their regulators to strengthen their balance sheets by boosting the ratio of their capital to assets. Which has forced them to raise additional capital where they can.

The collapse in the share price of the huge Italian bank Unicredit over the past two days shows how difficult it is for banks to persuade investors to provide them with additional capital resources. So of course banks are resorting to lending less and disposing of assets as another way of boosting that ratio of residual capital to assets.

Most vulnerable to this so-called deleveraging process (the fancy banking name for banks lending less and shrinking) are the emerging economies, especially the emerging European economies - and not just Hungary - because eurozone banks, especially Austrian, French, German, Greek and Italian banks, are responsible for 80% of these loans to the European periphery.

Romania and Poland are both for example very dependent on credit supplied by overseas banks.

Now many would argue that Hungary's problems stem from economic mismanagement by its own governments over a number of years. Certainly the confidence of international investors hasn't been helped by the unothordox steps taken by the current government to reduce its deficit and to reduce the autonomy of the central bank.

But the retreat into possible recession of the eurozone economy naturally weakens the economies of all adjacent and semi-dependent economies. And inevitably it's harder for a financially stretched government like Hungary to borrow, when governments of much bigger and stronger economies, like Italy's, are facing serious funding challenges.

For most of us the important point is the contagion one. Hungary is signalling it needs a bailout from the International Monetary Fund. It has been tipped over the edge by the crisis in the eurozone - that's been part trigger and part of the underlying cause.

If further austerity is forced on Hungary, that could make it harder for Hungarians to repay their debts - which could weaken eurozone banks even more, and simply reinforce the vicious cycle of financial disintegration in the currency union.

Or to put it another way, what is happening in Hungary isn't a big deal in itself - except of course for Hungarians, for whom it is the biggest deal of all right now. But it shows that failure to find a comprehensive, once-and-for-all solution for the eurozone will cause all sorts of serious accidents all over the world (including in the UK).

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 12.

    Treacle01
    5

    Thank you. I did not know that. I normally preface my posts with "I am not an economist but". I shall have to do so in future.

    Stanilic
    6

    I think that the IMF did, but hightailed it out of there when legislation was about to be passed for effective political control of the central bank.

    As someone said recently political control of a central bank is OK as long as it is not overt

  • rate this
    +1

    Comment number 11.

    Hungary is a basket case. Even if the EU/IMF can avoid the country as a whole default the corporate private debts to Eurozone banks will. But as far as I can see the current capital rasing requirements of these Austrian/Italian Banks do not make any provision for this. So basically the black hole is a lot bigger than they'll admit, is there any wonder with there is a second credit crunch.

  • rate this
    +1

    Comment number 10.

    You need to get onto The Archers. Debbie Aldridge runs a farm in Hungary. What's going to happen to it???

  • rate this
    +3

    Comment number 9.

    4.watriler
    Not sure you are correct about Cameron pretending UK will not be affected. One of the reasons the French are so upset is that the UK banks have not been taking up any more of the EZ debt, whilst, at the same time, trying to dump what they all ready have, ASAP.

  • rate this
    +9

    Comment number 8.

    This problem has been highlighted by the need for a rights issue by the Italian bank Unicredit this week because of this below.

    "This means that those who borrowed in Swiss Francs and Euros but repay in Hungarian Forints have a problem which means that the lender also has a problem."

    Unicredit was such a lender.

    http://tiny.cc/qgcdw

  • rate this
    +4

    Comment number 7.

    So the same overall banking system that caused the disaster recently by overlending to individuals is doing the same thing on a national scale, and extended credit to countries which are almost certain not to be able to repay, based on completely incorrect projections about the future economy?

    Where can I apply to be a banker? Seem to need neither knowledge or sense for a very well-paid job....

  • rate this
    +2

    Comment number 6.

    Wouldn't it be ironic if the Eurozone was pulled down by a non-Eurozone country?

    Time for the IMF cavalry to come riding over the hill.

    What would the Euro-sceptic position be on this? Fight with Custer or Sitting Bull?

  • rate this
    +1

    Comment number 5.

    @2 zipperty

    BIS statistics are on all cross border lending. So will include those swiss franc mortgages.

  • Comment number 4.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +2

    Comment number 3.

    There was a very good article on the Hungarian default posted back in October here

    http://www.golemxiv.co.uk/2011/10/hungarys-default-the-first-victim-erste-bank/

  • rate this
    +2

    Comment number 2.

    I assume that Peston is talking about sovereign debt. There is, of course the little matter of many Hungarians taking out loans in Swiss francs in order to buy property.

    This is a disaster for many and with the forint decreasing almost daily whether on the official or black market, these defaults have yet to impact both domestically and internationally.

  • rate this
    +21

    Comment number 1.

    Its no great surprise that when pressure is applied and times get tough people start to question the basis of money created out of thin air with no real intrinsic backing or production to justify it.

    The entire debt bubble based "growth" principle is just a big ponzi scheme; but people will continue to try to deny reality for as long as possible because the alternative is disturbing.

 

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