Orban's slow shift to a more interventionist approach is rooted in Hungary's rapidly deteriorating economic situation. At the heart of Hungary's political readjustment are the foreign currency-denominated loans taken out by a significant portion of the population and small companies before the economic crisis began in 2008. Hungary lacks a strong domestic financial sector, and the bulk of its banks are Austrian, Italian or German. These banks offered mortgages denominated in Swiss francs or euros — which seemed like an attractive proposition back when the forint kept appreciating, rising on the wave of economic development that spread throughout the EU periphery. However, when the wave came crashing down, so did the forint and the ability of the Hungarian people to service debt in strong currencies.
With the massive political capital conferred by his party's two-thirds majority in parliament, Orban set out in 2011 and 2012 to rescue the debtors with a series of radical measures, including imposing a fixed (and low) exchange rate on banks for some foreign currency loans. While the Central Bank of Hungary lauded these measures, international commentators and traders had been nervous before the July 26 announcement, fearing that Orban would again pass the cost of readjusting privately owned foreign exchange debt onto the banks.
So far, the majority of programs are aimed at managing the exchange rate exposure of households, but there have not been similar policies for small corporations. Like households, a large number of small- and medium-sized enterprises borrowed in foreign currency — about half of all loans for these companies. The depreciation of the forint and the appreciation of the Swiss franc have led to a significant deterioration of these companies' position in recent years. According to Hungary's central bank, the nonperforming loan ratio in the corporate sector may rise to above 24 percent by the end of 2014, the highest in Central Europe. This leaves the sector vulnerable to large-scale bankruptcies, which would increase unemployment and dash hopes of a recovery for the country.
Against this bleak outlook, the very non-specific answer given by the government July 26 is a sign that Orban is playing a more careful game with the banks. The foreign-denominated debt remains a burden on the Hungarian people, and general elections are coming in 2014, but Orban has to consider the possibility of retaliation from the banks. Since his last round of unorthodox policies, credit availability has tightened considerably and there have been rumors that foreign banks — the majority of the sector — were considering leaving the Hungarian market. With a very small domestic banking sector to pick up the slack, Orban knows he has few options short of nationalizing the banks themselves — a move that is not beyond the realm of possibility but that would draw the ire of the European Union and International Monetary Fund.
Orban's call for "peaceful talks" with the banks is designed to buy the country some time as he shores up Hungary's domestic banking sector by consolidating and sanitizing the country's smaller savings banks. Orban announced in June that his government would push for at least 50 percent of the Hungarian banking sector to be controlled domestically; the current figure is only 10 percent. The delay also enables Orban and his party to solidify their control over the entire government apparatus, making radical policies much easier to carry out. The call for compromise also soothes international markets. Markets have been very jittery in the past few weeks as the U.S. Federal Reserve continues contemplating the idea of tapering off its quantitative easing policies, which have buoyed investment in many emerging markets such as Hungary.
As the European economic crisis continues raging in the Continent's periphery, it is only a matter of time before the issue of foreign-denominated loans returns to the fore. Moreover, the International Monetary Fund was unceremoniously kicked out of Hungary last week, and tensions with Brussels over Orban's concentration of power remain. This means that an orthodox solution to the issue is highly unlikely.
