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Thursday, February 26, 2015

Hungary's Brokerage Crisis: How Far Will It Reach?

Hungary's National Bank, in its capacity as financial regulator, has recently suspended a Hungarian brokerage firm by the name "Buda-Cash" for major irregularities. The claim is that the infractions unfolded over a period of more than ten years, and the estimate of the magnitude given by the regulator exceeds HUF 100 billion (approximately USD 371 million at the time of the announcement). That may not sound as a lot of money in the world of Big Finance, but it is quite significant in small, semiperipheral Hungary. An inter-agency crisis group has been set up to deal with the fallout.

The charges include guaranteed returns, unreasonably long lock-in periods (effectively preventing clients from being able to cut their ties from the brokerage), both of which could be seen as clues pointing at a possible Ponzi scheme (where returns on earlier investments are paid from new revenues, rather than earnings).

The shutdown includes the brokerage itself and four small local banks in Hungary that are owned by the brokerage, typically involved in managing finances for municipalities of small towns and villages (which in turn include salaries for municipal employees as well as public public works and aid programs), and tiny-to-small, typically village- or small-town-based, local businesses. As of the announcement of the closure, none of those actors have been allowed access to their monies, threatening major wage arrears and a financial deadend for many. The Tax Office has announced that they will treat those whose monies are frozen in the crisis "with leniency." What exactly they will put on the table, as of tomorrow--nobody knows. State guarantees for small deposits--a requirement for an EU-compatible economy--will kick in once the investigations into the wrongdoing are over, which could be, in the most unfortunate case, years.

Estimates of the number of those affected go up to 100 to 120 thousand accounts (that is, approximately 3 to 4 % of households). Not a small problem, by any measure. A more recent report suggests that about 70% of the funds are missing from the four smaller banks; the rest from the brokerage itself. At least one of the four banks in trouble is the leading financial service institution in Southern Baranya county (south of the city of Pécs, on the Hungarian-Croatian border), one of Hungary's poorest rural areas. In that context, inability to access money could easily mean no food on the table for families.

A couple of things stand out as remarkable about all this.

First of all, it is the job of the National Bank as regulator, the authority that now claims major wrongdoing on part of the brokerage, to catch such wrongdoing. Either the regulator--which now says the scheme may have been going on for more than a decade (!)--"fell asleep at the wheel," as Lajos Bokros, former neoliberal austerity-finance-minister and former member of the European Parliament has commented, or the brokerage has operated a--hitherto--airtight, fully double bookkeeping system, one for itself, another for the regulator's benefit. The latter would involve a mind-bogglingly complex operation--essentially the re-doubling of all operations at the brokerage. This is not very likely, partly because of the inordinate costs, partly because of the high risk of being caught. Nevertheless, the head of the regulatory agency thinks that is what happened.

Either of those is the case, what is strikingly interesting is that, apparently, the regulator did not "discover" the irregularities at all; index.hu, a usually reasonably reliable investigative web portal reports that the case broke because somebody from the brokerage reported the irregularities to the National Bank--i.e., s/he made it impossible for the regulator "not to notice" them. The regulator fiercely denies that claim (i.e., it argues it "discovered" the wrongdoing by itself.) It's really difficult to see clearly in this regard, particularly because it is, clearly, in the interest of both sides to claim a story that puts them in a less damming light.

Given all that, what nobody talks about are some additional logical possibilities. I will list some of those I can think of, in no particular order. (This is not an exhaustive list, obviously.)

  1. Personal collusion between regulators and the brokerage (i.e., bad old-fashioned corruption);
  2. Informal personal ties between regulator and brokerage owners/management that would increase trust on part of the regulator to beyond-acceptable levels (remember, this is a tiny economy in which essentially everybody knows everybody else, from the time they entered the Finance Department at the economics university as first-year students, clearly a "small-size market" problem, the impossibility of normative processes under advanced informal linkage structure);
  3. What we see is the end of a political protection racket operation: something that would have prompted the regulators to "take it easy" on this particular brokerage for more than ten years,is now over;
  4. This is just the latest turn in the Simicska-Orbán mudslinging fest; 
  5. There is no crisis, all this is "foreign meddling," "provocation," an artificially induced crisis, designed to destroy trust in the Hungarian financial system, the government, etc.;
  6. There really wasn't anything unusual about this particular brokerage: this kind of irregularity, lack of accountability and transparency, the rampant spread of corruption is the "name of the game" when it comes to conducting business in post-state-socialist, semiperipheral, EU-member east-central Europe;
  7. Business-as-usual for the neoliberal post-state-socialist context wherein the regulator (falsely portrayed as a representative of "the state," instead of what it is supposed to be, a trustee of society at large) "takes it easy" on large market actors, especially big capital, and even more specifically big finance capital.
Next, there is a major question concerning the ripple effects of this crisis. Giving away both the slowness and the lack of proactiveness on part of the media sphere in Hungary, as yet, nobody is really talking about this there. I will mention three points here.

  • Crises exactly like this are known to have major negative effects on the well-being of national economies. Since Hungary is not a member of the Euro, its currency is not protected against crisis-driven devaluations. If the Forint were to lose its value precipitously--partly because of the adverse effects of this crisis on other economic actors that have been connected to Buda-Cash, partly due to the usual "moral hazard," i.e., the predictable sudden drop in trust in the Hungarian economy by actors both in- and outside, that would further increase the relative power of foreign investors in Hungary and slightly improve the foreign market conditions for Hungarian exporters, while placing a major burden on all actors whose incomes accrue in local currency but wish to consume, at least partly, abroad / in foreign currencies, e.g., in Euros (i.e., pretty much the entire capitalist class, the educated middle classes, and pretty much everybody else that wish to purchase basic staple commodities, given that the small Hungarian economy is extremely exposed to such imports).
  • Another, superbly interesting question is how far the crisis would go beyond Hungary. By virtue of its small size, lack of natural resources and the last generation's transformation into an export-oriented, second-tier semiperipheral manufacturing economy, Hungary has intricate economic ties with many of its neighbors. There are no checkpoints on the Slovak-Hungarian, Austro-Hungarian, Slovene-Hungarian and Croatian-Hungarian borders, it is extremely easy for actors on each side of those borders to engage in economic activities, including work, investment and even residence, on the other side, and, given the presence of ethnic Magyar populations in the remaining neighbors (Ukraine, Romania and Serbia) who even have a (Hungarian) constitutional right to a Hungarian passport without permanent residency in Hungary, not to mention the, by now over three-decade-long informal integration of a segment of the seasonal labor markets of the latter societies into the Hungarian economy, if there should be a major financial breakdown, all of the neighboring states might be adversely affected.
  • The third point is a scholarly / intellectual question regarding the extent and the structure of what is commonly referred to in the literature as "European integration." Hungary is a member of the European Union (without Euro-membership as mentioned above). Essentially, this implies that the density of the economic ties, from investment to the presence of labor migrants, that bind Hungary to the European Union (and, empirically, we can safely say that the densest ties are with Germany, Austria and the UK) is greater with the EU than elsewhere, say, with the US. In what ways, or whether, the coming crisis, should it happen, will affect those economies--say, major investors like Germany and Austria, or major recipients of outflows of Hungarian labor (remember, btw: all these flows are not only legal under EU rules, they are explicitly encouraged by all the rules and regulations guiding the European Union) including Germany, Austria, the UK or the Netherlands, will tell us about the character of "European integration." For, if it should happen that the Hungarian economy goes down the drain (or: at least sinks perceptibly) because of the possible effects of this crisis AND the crisis will not affect the rest-of-the-EU, or more specifically, Austria, Germany, etc., in any noticeable way, that might suggest that "European integration" is, for instance, perhaps, a tiny bit more asymmetrical in terms of the risks its membership implies than what the EU-literature is willing to discuss. (As an interesting aside--honestly, I'm not sure what to make of it, but it's definitely relevant: neither the Guardian, nor the Frankfurter Allgemeine Zeitung, nor Süddeutsche Zeitung, nor Der Standard, nor Die Presse--i.e., none of the major mainstream news outlets in the countries I have mentioned have--reported about this crisis up till this moment, i.e., 10:46 am Eastern Time, 16:46 CET, on February 26, 2015). (Still no news in the major European press as of 00:17 CET, February 28, 2015.)


  1. Today's update: clients have been allowed a _one-time withdrawal_ of HUF 60 thousand (EUR198.21) and told that there will be no more withdrawals until the end of the investigation (by the finance authority as well as the police). Could be years.

  2. Update on clients:

    Bank account holders will be compensated, automatically, up to EUR 100 thousand, within 20 days of the point of declaration of bankruptcy, if/when that should happen, by the National Deposit Insurance Fund. (Estimates run to the tune of HUF 70 billion missing from the banks.)

    Investors (where another HUF 30 billion seems to be missing) will have to file requests with the Investors Protection Fund, each claim is evaluated separately within 90 days, payouts can take an additional 90 days, and the ceiling is EUR 90 thousand.

    Otherwise no real news, except the beginnings of political mudfight, the govt party and the main opposition party accusing each other, with no real evidence worth mentioning.

  3. On March 3rd, the Deposit Insurance Fund began compensation of bank depositors up to a max of EUR 100 thousand.

  4. Today (March 10, 2015) Quaestor Fund--a second brokerage house after Buda-Cash--has collapsed in Hungary. Missing amount: 60 billion HUF; total base capital: 10 million. Very close ties to the government (joint trading houses, personal nexuses to high government officials) have been reported. Not a good piece of news for investors, not to mention the economy as a whole. Of course nobody talks about labor at all.


cover page of the book

cover page of the book
image used for the cover design by Anannya Dasgupta