Hungary: investing in Hell

By bne IntelliNews February 16, 2015

Kester Eddy in Budapest -


Hungary is backing investments in Hell. Really.

The Hungarian Investment Promotion Agency (Hipa), the state office charged with boosting trade and investment, has signed a “cooperation agreement” designed to “support the expansion” of Hell. A deal with the devil? Not quite. Hell, in this instance, is a Magyar energy drink that Hipa is keen to promote: so it's all just a catchy marketing stunt. The joke, however, is probably lost on those investors whose Hungarian experience has proved diabolical.

The list is long: it includes electricity, gas and water utilities, banks, telcos, retail, real estate, agriculture, media and recycling companies, all of whom complain – sometimes publicly, more often in private – of sudden legislative changes, usually enacted without consultation, that have turned their business model upside down, and sometimes closing it altogether, often to the benefit of domestic competitors. Most, but not all, affected are foreign-owned, typically with German, French, Austrian or a US parent.

Common to all these complaints is a government led by Viktor Orban, a former law student and anti-communist firebrand who heads Fidesz, the party he helped found in 1988 and which today claims to be “moderate conservative”: critics label it nationalist-populist, even autocratic.

But on February 9, in a surprise deal, Orban, for the Hungarian state, along with the European Bank for Reconstruction and Development (EBRD), signed a memorandum of understanding to each take up a 15% stake in Erste Bank's Hungarian subsidiary. Erste pledged to support the Hungarian economy with a new loan package worth €550mn, while the government promised to both reduce the bank tax and provide a level playing field for all in the banking market while supporting growth through a “predictable” regulatory and legislative environment.

Triumph of hope over experience

All sides hailed the agreement – originally proposed by Erste – as a turning point in the previously stormy waters of Hungarian government-banking relations, while stressing it also had positive ramifications for the broader economy. After admitting to the earlier “difficult relationship” between the banks and the government, the time had come “to move forward”, EBRD chairman Suma Chakrabarti told MTI, the state news agency, after the signing.

The markets certainly welcomed the news: shares in OTP, Hungary's largest bank, jumped almost 5% on the day of the announcement, adding another 4.4% the following day. But while the news was universally welcomed, long-time observers of Orban's Hungary were understandably cautious. “Perhaps it's hope over experience, in the sense that the government will take a less interventionist approach, [but] I think the government has finally realised that if the banks are hit with extra taxes, plus the effects of the forced exchange of FX loans into forint, it severely hits their ability to do business,” Nigel Rendell, economist with London-based Medley Global Advisors, yells bne IntelliNews.

Part of the problem for Orban's government is what Rendell termed the “artificial measures” to encourage lending to business, primarily the central bank's 'Funding for Growth programme', which has proved “less successful than many in government had hoped,” he says.

And with Orban famously pledging to create 1mn new jobs prior to elections back in 2010 – a pledge looking ever more difficult to honour half way through the time plan – action was needed. “Therefore, much better to cut the taxes, leave the banks alone to do what they do best  lend to the private sector. This should boost the domestic economy and ultimately the country's longer term growth potential,” he says.

But, as even the EBRD's Chakrabarti admitted, rebuilding trust after a sustained period of unpredictable behaviour is “always the most difficult thing”.

Rendell is less diplomatic: not only has Hungary become “an unpredictable destination for many foreign investors” under Orban, but investor sentiment has been further damaged by his praise for Russia and Turkey during last summer's infamous “illiberal democracies” address, he said.

Some relief

Clearly, the big question is whether Orban can be trusted to hold to the deal. Erste feels that the role of the EBRD is, if not a trump, at least an ace in the arrangement. The London-based bank has pledged to “strongly support” and “careful monitor” the deal, which is subject to six monthly reviews.

This, along with the personal involvement of Prime Minister Orban at the signing, points to a “strong commitment” by the government to carry this through, Axel Reiserer, the EBRD spokesperson, tells bne IntelliNews“Thirdly, and this goes beyond the EBRD, but we think is the strongest point, having acquired more than 50% of the Hungarian banks, I think the government has begun to realise that bashing the banking sector is no longer productive… it's shooting itself in the foot,” Reiserer said.

Although it was unusual for the EBRD to partake in a deal which enlarged state ownership of any sector, in the Erste case it was an encouragement for Erste, as a large, private bank, to stay in the country, Reiserer argued.

Of course, even assuming the Orban administration keeps its word, as Mihaly Varga, the economy minister admitted on February 10, the bank tax will still remain “quite high” after the planned cuts. For the banks then, the new deal will bring positive relief, but no return to the heady, heavenly profits attainable before the crash of 2008. A kind of purgatory, perhaps  but that's still better than investing in hell.

Related Articles

UK demands for EU reform provoke fury in Visegrad

bne IntelliNews - The Visegrad states raised a chorus of objection on November 10 as the UK prime minister demanded his country's welfare system be allowed to discriminate between EU citizens. The ... more

Erste claims Hungary is breaking peace deal with banks

bne IntelliNews - Hungary will breach its February agreement with Erste Group if it makes the planned reduction in the bank tax conditional on increased lending, the Austrian lender's CEO ... more

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.