Foreign banks account for roughly two-thirds of the Hungarian market, and with the exception of the country's largest lender in terms of assets, OTP, most of the major banks are foreign-owned. The parent institutions of Hungary's banks include Austria's Erste and Raiffeisen, Italy's Intesa Sanpaolo and UniCredit, Germany's Bayerische Landesbank and Belgium's KBC Group. These banks came to Hungary after the end of the Cold War, when Budapest realigned with the West. At that time, Western European nations with large banking sectors and strategic interests in Central Europe were attracted to these emerging markets.
The European crisis changed this dynamic. From a purely financial perspective, the devaluation of the Hungarian forint created serious problems for foreign banks operating in Hungary. Most of these institutions used to offer loans — most notably, mortgages — denominated in euros or Swiss francs. As people became increasingly incapable of repaying their loans, the Hungarian government passed two series of measures (in 2011 and 2013) that converted some of those loans to forints at a lower exchange rate. Brussels criticized Hungary, but it did not actually punish the government for converting the loans.
From a political point of view, the European crisis coincided with the return to power of Fidesz, the conservative party led by Prime Minister Viktor Orban. Budapest understands that Hungary sits along the edge of the European Union, which is relatively weak, and Russia, which has recently become more assertive in its western periphery. With Budapest feeling increasingly isolated from the European core, which is preoccupied with solving the problems of the eurozone, and with a growing divergence in the strategic interests of EU members, Hungary has an opportunity to balance ties with its eastern and western neighbors. Ultimately, Hungary is trying to secure its domestic position to create more room to maneuver with both sides.
Orban's most controversial policies — the nationalization of private pensions, the attempted neutering of the judicial branch, the ongoing nationalization of strategic energy assets — are all meant to give the state more power. Centralizing power will improve Budapest's negotiating position for what Orban sees as a changing political environment in the region.
Utility companies and banks are a logical element of this strategy. In September, Orban said that 2014 would be the year of a "battle for utility fees." Budapest plans to enact mandatory reductions in utility costs for households and impose additional taxes on companies. Orban has also suggested that he would be interested in nationalizing some utility companies — most of which are controlled by foreign firms such as Germany's E.On and RWE, France's EDF and GDF Suez and Italy's ENI. In the short term, forced reductions in electricity and natural gas prices would be a very popular measure, and Hungary holds general elections in the first half of 2014. In the long run, Orban hopes that greater control of the country's energy sector would give Budapest more leverage in its relationships with Russia and the European Union.
Banks have been severely affected by the political situation in Hungary. In addition to the imposed conversion of foreign-denominated loans, banks have been dealing with special "crisis taxes," a financial transaction tax, and constant criticism from Budapest that includes the threat of nationalization. In March, Orban said that foreign ownership of most of Hungary's banks was "not healthy" and that Budapest would try to reclaim at least 50 percent of bank ownership.
To some extent, Hungary's interests could align with those of foreign banks, which want to minimize their losses. The more banks see Hungary as a difficult place to conduct business, the more likely they will be to reach an agreement with local businessmen and leave Hungary. In other words, as Budapest is slowly squeezing foreign banks, some of them would end up selling their units at discount prices to the Hungarian state or to local groups close to Fidesz.
However, not all banks operating in Hungary are in the same situation. MKB, which is controlled by Bayerische Landesbank, will probably sell its operations in Hungary within the next two years. Bayerische Landesbank has until 2015 to offload MKB, under an agreement with the German government and the European Commission, after the institution received financial aid from the state of Bavaria in 2009. Bayerische Landesbank has already sold its units in Bulgaria and Romania, but its operations in Hungary are proving more difficult to sell.
In April 2013, Italy's Banco Popolare sold its small subsidiary to Hungary's MagNet Bank, making it the first Italian bank to leave Hungary. But larger Italian banks will probably not leave the country this year, though they will probably try to reduce their operations. Italy's largest retail bank, Intesa Sanpaolo, said in late December that it is committed to staying in Hungary after facing losses in the country in 2012 and 2013. Intesa Sanpaolo controls CIB Bank, one of Hungary's major banks, which recorded a net loss of 57.7 billion forints ($262.5 million) in the first six months of 2013. The bank has recently announced plans to restructure its operations in Hungary to increase profitability. Unicredit, which in September announced that it would scale down its operations in Hungary, is in a similar situation.
Austrian banks, some of which have a contentious relationship with the Hungarian government, are also struggling. Erste CEO Andreas Treichl has repeatedly criticized Budapest's banking policies, and his bank recently reported that losses at its Hungarian business rose to 100.9 million euros (about $137 million) in the first three quarters of 2013, up from 64.1 million euros in the same period of 2012. However, on Jan. 6 Erste issued a statement affirming that it has no intention of leaving Hungary and adding that it has a strategy to make the bank profitable again. Raiffeisen has said on several occasions that it could eventually leave Hungary, and in November a spokesperson for the bank said that it is considering several offers from potential buyers for its Hungarian unit. Raiffeisen's losses in the first half of 2013 totaled 83 million euros.
No Drastic Measures
At this point, expropriations that generally involve taking private property by the government without adequate and timely compensation seem very unlikely; Budapest would prefer to buy them out cheaply and slowly. And even if the state successfully does so, the process will take a long time as balance sheets are unwound. The fact that banks will only be able to sell once they deleverage means that consolidation will probably be gradual.
In addition, the Hungarian government will have to find someone to buy these banks, a particularly daunting prospect for institutions such as MKB that are hurting financially. Businessmen close to Fidesz will probably participate in the buyouts. For example, 49 percent of Szechenyi Bank is controlled by the Hungarian state, and businessmen close to Orban control the rest. Budapest has recently opened a bid for its majority stake in Takarekbank, the umbrella group of the savings-banking sector it nationalized in 2013. Local oligarchs will probably purchase the institution. Budapest could also use the banks it already partly owns, such as Szechenyi or Granit, to finance these operations.
We do not expect the Hungarian government to take drastic measures to buy these banks in the short or medium term. Fidesz will probably try to keep the transition from foreign to domestic ownership as smooth as possible to keep the financial crisis from escalating further. But Budapest will maintain its pressure on foreign banks to get the best deal possible. In this context, the most notable part of this process is that European Union has remained largely silent. The EU Commission criticizes Budapest every now and then, but no serious action against Hungary has been taken so far.
With its current actions, Hungary is not only seeking to partly undo the economic liberalizations that began in the 1990s but also pursue policies independent of the European Union. As the political fragmentation in Europe worsens, and particularly when the European Union seems unwilling or unable to react in a cohesive way, the main threat for the EU is that other countries in the region could decide to follow this model of a progressively independent policy.
Since the dissolution of the Soviet Union and the collapse of communist governments in the late 1980s, Central and Eastern European nations such as Poland, the Czech Republic, Slovakia, Romania, Bulgaria and Hungary established strong institutional and economic ties with the West. This strategy was accompanied by greater economic prosperity brought about by access to Western European capital, exports and labor markets. But the economic slowdown is creating more political instability throughout Europe, especially as some countries no longer see integration as the guarantor of economic prosperity and as Central and Eastern Europe are dealing with a resurgent Russia. Though each country is different and will react to this new geopolitical environment differently, most of these nations are currently reassessing their priorities in the light of Europe's crisis, and events in Hungary are being closely watched in the region.