The Hungarian Debt Crisis and the
Importance of Information
László Laukó
Óbuda University, John von Neumann Faculty of Informatics
Bécsi street 96/b, Budapest, 1034, Hungary
Phone: (36)-(30)-559-9285, laukol5@gmail.com
This document intends to give an overview of the
recent global crisis, including the Hungarian debt
situation more deeply.
INTRODUCTION
The 2008- 2009’s crisis has brought to the surface many
hidden problems in the world economy and in Hungary,
which pointed out the mistakes of economics, as well as a
severe balance disorder, which fundamentally affects the
opportunities of the next decade.
This study seeks to shed light on these problems and
also to provide guidance for the future. It’s a study about
Hungary and about why is it so different from the other
Central European countries, why are the challenges of the
crisis so problematic for Budapest?
THE BEGINNING
On 15th of September in 2008, the Lehman Brothers
sought bankruptcy protection. This is the symbolic starting
point of the recession, despite the fact that U.S. mortgage
crisis has already begun at least a year earlier.
Because mortgage lending did not only concern the
Lehman Brothers, but a lot of Americans and through them
a lot of institutions in Europe was also concerned, a
complete uncertainty emerged in the market.
It is not a coincidence that less than a month after the
Lehman bankruptcy the lending almost completely froze
the interbank markets. Since capital flow is one of the
most liberalized among the factors of production, the
decline of this segment of the economy occurred
immediately among the partners too, directly or indirectly.
Countries such as Latvia, Hungary and Romania were
not able to finance themselves, so in a very short time they
would have become insolvent without outside help, which
means bankruptcy. Therefore, they needed to ask for help
from the IMF and the EU.
CENTRAL EUROPE
The small open economies of Central Europe, of
course, could not avoid the crisis. This was expected, since
more than 60 percent of their foreign trade is made by the
EU, and also, the intertwining of the capital markets
mostly takes place within the economic integration.
The year before the economic crisis Poland, Hungary
and Romania fought with twin deficits.
In two of these three countries, however, another problem
appeared:
Poland and Hungary had very high external debt. This
meant strong financial exposure just before the onset of the
crisis.
However, there was a major difference between
Warsaw and Budapest: significantly different levels of
government debt relative to total debt ratio.
In the case of Poland, this value is 30.5 percent,
meaning the total foreign denominated debt is only a third
of the national debt.
In Hungary, however, this type of rate is considerably
higher: 62.44 percent. In other words, the debt is nearly
two-thirds of the external debt. So it was the immediate
problem in the fall of 2008. We are talking about a level of
debt, which is absolutely necessary for the financing of the
external financial markets. Especially if more than two
thirds of this debt is foreign currency denominated.
FOREIGN EXCHANGE LIBERALIZATION
Like all Central European countries, Hungary also
would have liked to adopt the euro as soon as it becomes
possible, at least in the pre-crisis period. The foreign
exchange liberalization started on 15th of June in 2001 was
an important milestone of this plan. That means the
completely free convertibility of the forint.
The liberal-socialist coalition won the spring
parliamentary elections in 2002 with a majority. This
coalition wanted to keep their majority or increase it in the
municipal elections. To achieve this objective, an
unprecedented level of government expenditure has begun,
which meant 190 billion HUF in the budget for the autumn
elections. The populist activity of the left-wing reached its
goal: an overwhelming success in the local elections.
Then, the first 100-day program was followed by a second,
with an approximate value of 65.5 billion HUF.
Since these payments were not covered - the budget
deficit in 2002 proved this -, the socialist-liberal
government wanted to recover this amount of money. For
this, the most appropriate tool is inflation. The only
solution was to move the exchange rate with 2.26 percent.
The inflation started, therefore, the National Bank had to
intervene. They raised the base rate with 12.5 percent, but
the world lost its trust towards Hungary. The other
problem with the rate increasing was that the borrowing
has become more and more expensive. Furthermore,
because of the unlimited convertibility of the forint banks
could lend cheaper in foreign currency, of which the
Hungarian economy, its public and private sectors had
made full use. [4]
A government report, which was made in 2011, is
talking about 576 thousand households that have housing
mortgage loans, so 1 million 800 thousand people - that is,
every fifth Hungarian people - are affected by housing
loans. Almost half of the households have - 287 thousand
families (945 thousand people) have foreign-based, and
289 thousand families (960 thousand people) have forintdenominated - mortgage home loans. [1]
SOLUTION?
CREDIT
But why do we need to use credit instead of savings?
Was it not possible to avoid this trap?
Taking out a loan is a serious decision since it usually
has an impact for many years. However, with caution, we
can borrow money to reach our goals sooner, but for
choosing a credit first we need to decide why we need a
loan.
The Cofidis Credit Monitor research shows that among
young people, very few can put their monthly income in
savings. More than half of the 18-29 years olds feel that
their financial prospects have deteriorated. 10% thinks that
they live better than a year before. If you look at the older
ones, 16 percent of the 18-69 years olds feels that their
monthly income is not enough to cover their basic needs.
Half of the respondents could cover their most important
needs, but they also spent most of their monthly earnings.
According to the research, only 5 percent can have little
monthly savings. [3][5]
According to the 2012 research by Scale Research
another conclusion can be drawn.
According to the survey, only 13 percent of the
population have any savings, and even at the highest
income category (over 200 000 HUF per month) this
proportion is around 25 percent. 85 percent of the
customers believe that in the following year they can
afford less to spend on their needs and can have less
savings.[2]
The solution for this crisis would be a strong forint.
Hungary would need strong forint due to the import of
energy sources and the private and the public sector have
accumulated a huge foreign debt. But because the people
do not have the power to make the forint stronger they
need to use the HUF consciously.
Maybe if the people would get enough information or
get the proper education over the years, then it would be a
bit different.
If the people would know their own financial position
and their possibilities then they would not make a lifetime
mistake or they would not make any financial mistakes at
all. [4][5]
CONCLUSION
This is why I think it is necessary to make an
application which contains all the basic information about
the financial world. And beyond that, it teaches the
methods and formulas to choose the better opportunity.
The past mistakes cannot be undone, but you can learn
from them and after seeing your current financial status
with monitoring your daily spending and after learning
which element of information is important from the rental
data and how it can be used to compare loans anybody can
make the best decision when it comes to solving a
financial problem.
REFERENCES
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[1.] http://www.kormany.hu/hu/kozigazgatasi-es-igazsagugyiminiszterium/tarsadalmi-kapcsolatokert-felelosallamtitkarsag/hirek/jelentes-a-devizahitelesek-helyzeterol
2002.I.n. year
2002.III.n. year
2003.I.n. year
2003.III.n. year
2004.I.n. year
2004.III.n. year
2005.I.n. year
2005.III.n. year
2006.I.n. year
2006.III.n. year
2007.I.n. year
2007.III.n. year
2008.I.n. year
2008.III.n. year
2009.I.n. year
2009.III.n. year
2010.I.n. year
[2.] http://www.pwc.com/hu/hu/sajtoszoba/2012/lakossagibankszolgaltatasok.jhtml
The amount of HUF loans
The amount of foreign currency loans
Change of the rate of foreign currency loans and the rate of forint
loans [4]
[3.] http://www.blikk.hu/blikk_aktualis/konyv-helyett-az-okostelefon-ameno-2093105
[4.] http://unipub.lib.uni-corvinus.hu/1228/1/kg_2013n1p77.pdf
[5.] http://hitelesen.postr.hu/mire-hasznaljuk-a-hitelunket