For Hungary’s financial regulators, bad luck comes in threes

March 11, 2015

matolcsy

Hungarian Central Bank governor György Matolcsy: “What, me worry?”

UniCredit warns that Hungary’s long-awaited credit rating upgrade may be postponed as a result of the suspension of three financial institutions over missing assets amounting to some HUF 315 billion (USD 1.2 billion), or roughly 1 percent of Hungary’s GDP.  It also warns that fiscal losses arising from reimbursing depositors and retail investors “could push the budget deficit to over 3 percent from the planned 2.4 percent for 2015”.

In its capacity as regulator and supervisor of Hungary’s financial system, the National Bank of Hungary (MNB) announced on Tuesday, February 24 that Buda-Cash Brókerház Zrt. could not account for HUF 103 billion of financial assets.  It was subsequently revealed that HUF 62 billion of this belongs to the clients of four regional banks owned by the same group of investors that own Buda-Cash.  Altogether some 73,000 clients were affected, of which 15,600 were clients of Buda-Cash.

MNB revoked Buda-Cash’s license and initiated the liquidation of the brokerage house, assigning administrators to the banks, which are also to be put into receivership.  On Monday, March 9, police arrested three people, including CEO Péter Tölgyesi.  Five people will remain free pending trial.

Hungary’s National Deposit Insurance Fund (OBA) has announced it will reimburse some 64,000 retail clients a total of HUF 89.1 billion.  Largely depleted after last year’s payouts in the wake of the collapse of the Széchenyi Bank, the fund announced it would cover payments with the proceeds of a HUF 100 billion loan from the Central Bank.

On Thursday, March 5, MNB suspended the permit of Hungarian Ertekpapir Zrt., a financial markets provider, after an investigation revealed that some HUF 1 billion of assets could not be accounted for.  According to UniCredit, an additional HUF 5-6 billion of losses may result from difficulties paying outstanding bonds.

Reflecting the eternal optimism of Central Bank governor György Matolcsy, MNB tried to reassure markets by announcing that the losses were “a fraction of those uncovered” earlier that week.

On Monday, March 9, the financial arm of the Quaestor group, Quaestor Financial Hrurira Ltd., declared bankruptcy after it was unable to repay some HUF 60 billion of outstanding bonds due to a “lack of confidence in financial service providers” triggered by the “criminal offense at Buda-Cash”.

According to online financial daily portfolio.hu Quaestor Financial Hrurira Ltd. was created several years ago for the purpose of raising funds for its parent company, the Quaestor Group, whose activities were largely financed by bond issuances over the past few years.

On Tuesday, March 10,  deputy central bank governor Lászlo Windisch held a press conference to announce that, on top of the HUF 60 billion of legally issued bonds coming due, the company had issued HUF 150 billion of illegal bonds that did not have the approval of Hungary’s financial oversight authority, making this “the biggest brokerage scandal in the history of the country”, according to  portfolio.hu.

Windisch claimed that brokers had tampered with their IT systems to cover up irregularities.

To date no one has been taken into custody.

At a separate press conference, Minister for Foreign Affairs and Trade Peter Szijjártö announced that the government had “terminated with immediate effect” contracts with companies owned by Quaestor chairman-CEO Csaba Tersely involving the operation of the Hungarian trading house in Istanbul, Turkey, and a visa center in Russia.

Foreign analysts reacted to the news with a mixture of concern and bewilderment.

According to Dan Bucsa, a London-based analyst at CreditBank: “While the NBH has estimated fraud to be more than HUF 315 billion in total, net losses will probably be smaller.  However, it will take a while for the central bank to recover large sums of money from the three firms.”  He said “fiscal losses could push the budget deficit to over 3 percent from the planned 2.4 percent for 2015″.

In the wake of the three scandals, the Central Bank has announced plans to tighten supervision by increasing the frequency of inspections and the amount of fines, having permanent inspectors for on-location supervision, tightening supervision on auditors and IT systems, and increasing transparency through establishing a ledger for brokerages, reports portfolio.hu.

Although Bucsa thinks the risk to financial institutions incurring significant losses is small, he warns that the reactions of the forint and the bond market shows that “Hungarian assets remain vulnerable to event risk”.

References:

http://www.portfolio.hu

http://www.atv.hu/belfold/20150309-buda-cash-ugy-orizetbe-vettek-negy-ember