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TESS VIGELAND: This week, as part of our coverage of the fallout from the global financial crisis, we report on a region that is a relative newcomer to capitalism.
Twenty years ago eastern Europe lay behind the Iron Curtain. Countries like Poland, Hungary and Czechoslovakia had communist governments and were firmly under the control of the Soviet Union. Today all of these countries are democracies with capitalist economies. But they depend heavily on Western investment and Western banks. So how are they faring in the credit crunch?
Today Stephen Beard reports on the first major European casualty of the crisis — Hungary. Where just today the parliament approved a $3 billion rescue package for the country’s banks.
STEPHEN BEARD: The standard of living has improved enormously here since the collapse of communism. And for the last decade Hungarians have been on a spending spree. Car ownership has more than tripled. And we’re not talking about rickety east European models like the Trabant. These are mostly American-, Japanese- and West European-made vehicles.
Hungarians have also been buying bigger and better homes. Much of the extra spending has been financed with debt. And here’s the problem: Debt in a foreign currency.
Analyst Kristian Szabados:
KRISTIAN SZABADOS: More than 50 percent of Hungarian households have loans in foreign currency, mainly Swiss francs and euro. Of course, when the crisis came into Hungary they were hit immediately.
In October, hedge funds sensed that the Hunagrian currency — the forint — was vulnerable. They sold it short, betting it would collapse. And it did, making all those foreign loan repayments much more expensive.
I’m at an apartment building in a working-class neighborhood in Budapest. I’ve come to find out how homeowners have been affected.
Eva Groniewska lets us into her new ground-floor flat. Fifty-five years old and divorced, Eva took out a mortgage in euros to buy this place.
EVA GRONIEWSKA: I took it in euro because interest rate was much lower.
Much lower than if she’d borrowed in Hungarian forints. But when the forint plunged against the euro, Eva’s payments shot up by 20 percent.
BEARD: Did you think at the time there might have been a danger that the Hungarian forint might fall and therefore your repayments would increase?
GRONIEWSKA: Yes, of course. But I did not think about such a big movement, such a crisis.
BEARD: You don’t think there’s any danger you could lose your home as a result of this crisis?
GRONIEWSKA: I hope not, but there is a danger, of course.
Hungarian governments have also borrowed heavily in foreign currencies. They used the money to double public-sector pay, hike the state pension and subsidize mortgages.
In the baroque and cavernous headquarters of the Economics Ministry, finance chief Gordon Bajnai and his colleagues have now stabilized the currency. They got a little help to fend off speculators — $25 billion in loans from the IMF, the World Bank and the European Union.
GORDAN BAJNAI: Many hedge-fund managers have been speculating against Hungary, and we had to send them a very strong message: Hungary has very strong friends. This should ensure everyone that Hungary is even more stable than ever.
But Bajnai admits the country is heading into recession. Eighty percent of the banks in Hungary are foreign owned. If the credit drought continues, those banks may feel their cash is better deployed bank home. And the damage may not end there.
Kristian Szabados heads the Political Capital think tank. He believes that as the economy falters there’ll be a backlash against American-style capitalism.
SZABADOS: People think that, “Oh my God, the market economy is over. I don’t believe in the market economy. I need very strong state, very strong government to help me out.” And this will further damage the social attitudes towards market economy and competition and freedom.
No one is forecasting a return to communism. Hungary is fully democratic and a member of the European Union. But with rising unemployment there are small but ominous signs of discontent.
This neo-fascist paramilitary group, the Hungarian Guard, is antisemitic and anti-gypsy. In a recent public ceremony it swore in several hundred uniformed members.
If living standards continue to fall, there could be more recruits for the Hungarian Guard.
In Budapest, this is Stephen Beard for Marketplace.