György Surányi: Huge Losses at MNB Down to ‘Indefensible’ Policies

György Surányi, former MNB governor (1990-91 and 1995-2001), former chairman of CIB Bank and CEE regional head of Intesa Sanpaolo, and now professor of finance at Corvinus University, deemed “at least two-thirds of these central bank losses” to be the result of “mismanaged,” “indefensible” and “crazy” economic and monetary policies when speaking to foreign journalists on July 19.

Perhaps surprisingly to the non-expert, Surányi initially stressed that loss or profit at a central bank does not indicate a mismanaged or well-run institution.

“I have several examples of central banks making losses; however, the monetary policy was [...] excellent,” he said, pointing to the West German Bundesbank in the 1960-70s and, more recently, the Czech National Bank.

The Bundesbank, for example, facing massive inflows of U.S. dollars, was forced to sell Deutschmarks to avoid abrupt (and damaging) appreciation of the national currency.

“When the Bundesbank was buying up tremendous amounts of dollars, […] it created tremendous losses because the value of the assets, namely the dollar, was depreciating, whereas the liabilities, in German marks, were increasing,” he said. However, the Bundesbank earned praise for maintaining price stability.

Currency Appreciation

The Czech central bank has acted similarly in recent years, selling koruna to buy euros to manage the appreciation of its currency, sometimes incurring “massive” losses.

However, apart from the last 18 months, where there has been a takeoff of inflation everywhere, the Czech Republic has maintained price stability for the past 15 years, Surányi stressed. “So that’s why losses in themselves do not [judge] monetary policy positively or negatively.”

So, what about Hungary? “The situation here is a bit different. It is different because the root causes of these losses, I mean at least two-thirds of these losses, are attached to the mismanaged macroeconomic policies,” he intoned.

In an otherwise complex nutshell, Surányi argues that Hungary pumped far too much money into the economy, for longer than was justified and often to the wrong players, in the name of stimulating growth while “unprofessionally” ignoring the risks to the forint exchange rate of rising inflation (see separate box).

When world energy prices suddenly rose last year, the market confidence in Hungary’s fragile state evaporated, and the forint plunged to HUF 430 and more to the euro, propelling the country to the top of the European inflation league.

In particular, Surányi points to the “Lending for Growth” and later “Bonds for Growth” schemes as fundamental elements of the problem. Interestingly, with the credit supply dwindling in the early 2010s, he was initially an advocate of lending.

‘Absolutely Acceptable’

“In the post-financial crisis period from 2009 to 2015, the credit stock in Hungary was contracting each and every year. Under these conditions, it was absolutely acceptable for the central bank to facilitate credit growth; therefore, I myself also welcomed its implementation,” he said. However, the MNB put this facility on the table at a fixed zero interest rate for 10 years.

“It’s an unprecedented, open, unhedged interest rate position within the central bank balance sheet, which means, the higher the inflation, the higher the transfers towards the borrowers, and the higher the central bank losses,” he said.

Thus, this policy turned to bite the providers once inflation started to accelerate last year, and the MNB was forced to move the base rate up to 18% to defend the forint.

“Professionally, it was a dramatic mistake not to provide this facility on a floating basis,” Surányi argues.

He says the introduction of the growth bond facility in 2019 was even less justified: the economy was already growing at more than 5%, and credit growth was up to 17% per annum. Citing an article in the economic weekly HVG, Surányi said, “Roughly 60% of this facility was directed towards the cronies of the government.”

Politicians, Central Bankers: Ignore the Exchange Rate at Your Peril

In the fall of 2016, with the pound sterling under pressure as a result of the Brexit vote, David Willets, an economist formerly with the U.K. Treasury, wrote in the Financial Times: “Governments that start with no commitment to the value of [their] currency often end up caring when it keeps falling.”

It seems no one at József Nádor tér or in Bank utca read that particular FT. If they did, they ignored it.

As György Surányi scathingly notes: “The fall of the currency last year, primarily in the second half of last year, was the consequence of a coordinated, foolish exchange rate policy of the government and central bank. For years, they declared publicly that they didn’t care about the exchange rate of the forint. In the case of a small, open economy, one should not say such a sentence.”

The former MNB governor admits that if a central bank adopts an inflation-targeting system, there can be no direct, explicit exchange rate target, “but to say that we don’t care about the exchange rate is crazy.”

As a result of the high fiscal deficits, poor targeting of subsidies, and a policy of having a weak forint, when world energy prices surged last year, the forint went into free fall.

“So, then they [the government and central bank team] were frightened. They understood that this was an incredibly dangerous game, what they were doing with the currency. That’s why […] the central bank was explicitly forced to increase the reference rate by 500 basis points, from 13% to 18%” to (successfully) stabilize the currency, he argues.

But with the central bank offering short-term interest rates of 18%, commercial banks, awash with deposits on which they pay little or no interest, can make huge profits at no risk.

Since a large proportion of government and central bank largesse from 2013 onwards went to “government cronies” who in turn, rather than spend on high productive investments, put much of the cash into bank deposits, there is “at least HUF 11,000 billion in excess liquidity deposited by the commercial banks with the central bank, on which the commercial banks are makingwindfall profits,” Surányi says.

Part of this windfall profit is taken through the HUF 250 billion sectoral “excess profit tax” imposed on the banks by the government, but, he argues, this still leaves the recipients of all this funding as the ultimate winners, and the ordinary taxpayer as the ultimate losers in this exercise.

Even as this issue of the BBJ paper went to press, the matter seemed far from clear to those in charge. While both Minister of Finance Mihály Varga and the MNB now vociferously advocate the importance of a stable exchange rate, Minister of Economic Development (and former MNB deputy governor) Márton Nagy appeared committed to his earlier views, saying: “Every public reference to the exchange rate level by economic policymakers is extremely harmful,” as it should be left to the market to determine the exchange rate.

This article was first published in the Budapest Business Journal print issue of July 28, 2023.