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 â‚¬17,000 worth of stuff every year, but buys over â‚¬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?