Hungary’s default – the first victim, Erste bank


By David Malone
Erste bank of Austria has just announced a 1.6 billion Euro loss. It’s share price fell nearly 10%.

It is the nature of the losses more than the amount which is critical.  First and foremost the losses were because of Hungay’s default (Yeah that’s right, Default) and the ‘unexpected’ slow down in Romania. 

Hungary passed a law which is now close to coming in to force, which allows people who borrowed in Swiss francs to pay back on Hungarian florints.  It is this law which is causing the banks to lose about 21%-25% on a large chunk of their loans.  I wrote about this in Greece, Hungary and Italy – a nexus of debt failure.  I made this point then, and it is now clear I was correct, that the law amounted to a default.  While everyone was looking at Greece asking will they, won’t they, Hungary did.

The results are now, it seems, finally surfacing.  Erste bank is the first to surface.  It won’t be the last.  This evening [Monday] there are all sorts of figures and explanations flying around.  The Hungarian site  quotes from Erste’s press release.  The bank’s press release makes clear the cause of the losses,

“…the Hungarian parliament has recently passed legislation that cuts banks’ FX claims against their private mortgage customers by about 25%…”

The release goes on to detail that Erste expects about 700 million euros in write downs losses and that Erste now expects 62% of Hungarian loans to become Non-performing!

However over at ZeroHedge they pick up on a €460 million loss on a total of €2.8 billion in sovereign CDS business.  As the article says, this is a surprise because according to the recent European Bank Stress Test, Erste didn’t have any sovereign CDS exposure at all.  How could this be? Seems the bank had not been holding them in its trading book where they would be seen as a risk but outside that book where the bank held them at mark to myth, sorry model prices, and counted them as ‘Credit Surrogate”.  And in banker/accountancy world changing the name and moving the numbers in a ledger is all it takes to make it all go away.

Imagine if the army simply wrote down unexploded mines in a different book called ‘Stored’ rather than ‘unexploded’ and then said they were now not dangerous because they were no longer going to be used for stepping on and thus there were not ‘unexploded’ mines but ‘stored’ and there was therefore no danger! Excellent.  Job done! Makes me think we should send the bankers and their accountants to Helmand to a mine field and leave them there.  See if they can make it out alive, simply by writing things down in different columns.

But Erste’s knavery aside, there are larger implications.  First, if Erste have been hit then other banks will follow.  The only bank which does more business and is therefore likely to be more exposed in Eastern Europe than Erste is… UniCredit!  Much of their exposure will be through their subsidiary Bank Austria.  What I wrote about way back in Decmber of 2010 in Dominoes falling from the East is now starting to come true.  As always my timing is terrible.  A bad case of premature prognostication.

Erste also sold CDS protection to other banks.  About 2.4 billion euros worth, and of course those other banks will no doubt have sold CDS to other banks and to each other, as well as to Erste.  How many of them have not declared any of those CDS because they too were holding them in a convenient column where they ‘weren’t at risk’? I should think we’ll find out soon.

Which brings me to Raiffeisen, the other big Austrian bank, down 5%.  Raiffeisen was quick to say it hardly had any sovereign exposure to Europe’s troubled countries.  But I note that it specified sovereign exposure which conveniently excludes municipal or bank exposure.  I think if they had neither of those either they would have been quick to point it out.  A sin of omission I think.

Other banks who will get stung in Hungary? BeyernLB (Landesbank) which majority owns Hungary’s MKB, Intesa (the other Italian insolvent) which majority own CIB and KBC bank which is Belgium’s other bank.

Is it coincidence that KBC is suddenly selling (announced Monday) it’s private banking unit to Qatar?  Need a little bit of cash do we?


Courtesy of David Malone –

David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: