September 23, 2006

Hungary's Disney economics will hit Irish investors hard

Posted in International Economy · 7 comments ·
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Two years ago, I travelled to Budapest and had a wonderful time. The euphoria of EU accession was in the air and the plane was full of Irish investors clamouring to get into the property market.

But something was not quite right. Behind the European flags, the Beethoven and simultaneous translations, the economic numbers did not stack up.

The following week, on Sunday, May 2, 2004 – the day after EU accession – I wrote in this column: “In the meantime, all the accession countries – all of which have floating currencies – will be subject to repeated currency crises. Why? Because they will spend more than they earn in the next few years, and this will cause their trade deficits to rise.

“The bigger the trade and current account deficit, the bigger the risk that their currencies might have to devalue to make their companies competitive.

“The problem with this is that their interest rates will have to rise to protect the currency. The higher the domestic interest rates, the slower the growth rate, and the slower the growth rate, the more the currencies look overvalued.

“In fact, Hungary is a good example of what is likely to happen elsewhere. The average Hungarian worker produces €17,000 worth of stuff every year, but buys over €19,000 worth. So Hungary has a current account problem. The country needs to borrow to pay for this profligacy.

“Not surprisingly, Hungarian interest rates are 12 per cent. At 12 per cent, no one is investing enough (apart from the Paddies buying property).A large fall in the currency is highly likely in the next few quarters as currency speculators bet that the government cannot rule with such high interest rates.

“The speculators reckon that the only way to force interest rates down is a much cheaper currency that will boost exports and rein in some of Istvan’s more conspicuous consumption. Once the Hungarian forint goes, the markets will turn on the currencies of better-run economies like Poland and the Czech and Slovak republics.”

Today Hungary is facing a currency crisis – and worse. Cars are burning in posh Budapest 5 – the very district where the Irish are the main investors. The television station was taken over briefly last Wednesday.

The mob wants the prime minister out and, for four consecutive nights, riot police and protesters have been having pitched battles in the middle of the capital. This political instability – based on macroeconomics of a most delinquent style (described above and more on that later) – has clear implications for the millions of euros that Irish investors have ploughed into the country in the past four years.

You would therefore expect that the estate agents who are selling/have sold these properties would have some information about what is happening. An investor would expect a reassessed market analysis based on these events. What is going to happen to the currency? Where are interest rates going to go? What will happen to the euro timetable? These are crucial question for investors. Yet this weekend not one of the websites that advertises properties in Hungary even mentions the state of near anarchy, the economic crisis and the likely ramifications. Surprise, surprise!

The crisis can be summed up by bad economics – which have been evident for some time. The Hungarian government never reined in the economy. In fact, it did the opposite. Hungary’s government tried to spend its way out of the problem. So by this summer – two years after accession – the current account deficit was running at 8 per cent of gross domestic product (GDP) and the budget deficit at 10 per cent of GDP. Interest rates remained in double digits, which squeezed investment, and the growth rate fell from 4 to 2 per cent. The country is a basket case – economically at least.

For the Irish investor, all this was masked by the sales patter about accession, the EU and Hungary eventually joining the euro. The exit strategy sold to the Irish investors was that, by 2008, Hungary would be in the euro and interest rates would fall to 4 per cent, kick-starting the domestic market, which would buy apartments from the foreign investor.

That will not happen now. For anyone who took ten minutes to look at the numbers – even as long as two years ago – this was Disney economics. But most investors didn’t even ask. All this was becoming apparent to the average Hungarian in recent months but the spin and smoke and mirrors of government kept the real extent of the catastrophe obscured. Then last week a political bombshell landed.

A tape was released with the prime minister, Ferenc Gyurcsany, telling party colleagues – in closed session – that the government had been aware of the mess for a few years and had ”lied to the people” to keep it from them.

This naturally incensed ordinary Hungarians and prompted the anger that we saw on the streets in the past few days.

When the anger dies down, the problem will remain. The currency is too expensive – it will have to devalue. The currency speculators who are this weekend amassing resources to finance massive ”short-selling” of the forint in the days ahead, sense blood.

In the same way as we could not do anything against the markets in 1993 when we devalued, there is absolutely nothing the Hungarians can do, except devalue and tighten their belts. This means that Irish investors who have already bought will take a bath. The euro value of your investment will fall by the same amount as the forint devalues – be that 10 per cent, 20 per cent or even 30 per cent.

The question is whether the devaluation prompts a recovery like the one we saw in 1993.Time will tell. Hungary looks like very bad value today, but after a huge devaluation it should be a goldmine. The question is whether this will be the last crisis on the road to European Monetary Union. Nobody can be too sure.

Just remember we devalued five times between 1980 and 1992 on the road to the euro – who’s to say the Hungarians won’t do likewise?


  1. john d

    Do I detect a bit of ‘I told you so’there,and why not?
    As far as I am concerned you have earned the right.
    Have you seen asking prices for houses here in Ireland are
    down up to 20% in certain areas and this is just the start
    in my opinion,keep up the good work David,we dont need
    people saying they were never warned.

  2. Garry

    The devaluation hasn’t happened, nobodys lost money yet.
    But its always nice to see speculators getting done
    over …

    Hopefully the locals will get to buy back the properties on
    the cheap and the net result is an improvement in building
    standards for Hungarians and a few lessons for the
    parasites buying their country!

    If you want to make a killing in the property market, why
    not buy out the only well in a sub-saharan village and
    start charging for the water…. Buying up the best real
    estate of countries that have suffered under communism or
    dictatorships isnt much better than that… Plenty of cheap
    houses in Baghdad boys, sure its only a couple of hours
    from Turkey…

  3. Ray

    “The euphoria of EU accession was in the air and the plane
    was full of Irish investors clamouring to get into the
    property market”

    Like pigs around a trough

  4. adrian

    Hell David I was in budapest five years ago on a stag
    weekend, jeez it was my own!The place seems to have a
    serious wealth disparity, trabants and ferraris and no ford
    focuses!The beer was good and the cage dancers were pretty,
    bad teeth mind,porn capital of europe you know! But the one
    thing that caught my attention was the little notices
    around the place referring to the flooding Danube back a
    hundred years or so. If you’re gonna invest, invest on high
    ground!
    By the way what happened to free speach in this country?
    Hitler silenced the disenters and look what happened.
    Reinstate my last comment.

  5. ray mcmanus

    At the moment i am living in budapest. At this very moment
    i am waiting at the upc head office waiting to get
    connected to upc I have been here an hour and i am still
    waiting.I have been waiting for six weeks and have had to
    order the service three times a service which should take
    five days for a connection.This is one of the many reasons
    why the hungary economy is banjaxed. Warning to all irish
    investors forget about investing here this country has no
    future.

  6. brendan

    David, I felt compelled to respond to a view inaccuracies
    in this article.

    Where are Hungarian interest rates 12 per cent? They were
    increased to 7.75% just after this article was published,
    at which point they were 7.25%.

    It has already been widely reported in the local Hungarian
    media since last April that Gyurcsany lied about the state
    of the economy to get re-elected. This was the main cause
    of the currency slide back then. (Incidentally, the
    forint has now strengthened to 265HUF-1Euro from June’s
    low of 283HUF-1Euro.) The tape scandal brought the
    information to a wider audience and was essentially a
    media event strategically timed to occur before the local
    elections, which Fidesz ran away with.

    In my experience, the Irish media reporting of the
    protests was quite inaccurate.

    The Irish GDP deficit was running at 120% in 1987 before
    currency devaluation. 10% is the highest in Europe, but
    EU members such as Greece and Portugal have also had
    deficit problems in recent years.

    The Euro didn’t exist when Ireland devalued its currency,
    while Hungary already uses it in an unofficial way. At
    the minute, particularly in the central districts of
    Budapest, many prices are determined by the value of the
    forint against the euro at any particular time. So
    effectively, the euro value of investments does not
    necessarily fall in direct relation to the fall in the
    value of the forint.

    The huge economic problem, which Hungary still hasn’t
    really come to terms with, is the underpayment of taxes.
    In my opinion, the vast majority of people over here get
    paid cash in hand on top of their official salary. This
    is such a widespread problem that it will take years to
    fix. The government have already put some measures in
    place to tackle it but it’s likely to take 5-10 years. It
    is a mindset change, but I believe that it will happen.

  7. James

    Forint gaining strenght rapidly .Does not look like we are heading for devaluation any time soon. Tough measures having effect ;convinced the traders stabilizing currency.

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