Hungary’s Stock Market Has Same Woes as Capitalist Counterparts

Each Tuesday at 10 a.m., a group of well-heeled MBA types stroll into a posh downtown bank building, take their seats around a wooden table and engage in genteel discussion for 40 minutes as they buy greengrocery firms and sell chemical companies.

This is Hungary’s stock exchange, a fledgling market that poses little threat to Wall Street. But the only stock and bond market in the Soviet Bloc suffers many of the same ailments--and then some--of its big brother exchanges in New York, Tokyo and London.

Since its founding in December, 1987, Hungary’s stock market has been buffeted by several insider trading scandals, a dangerous drop in prices and sluggish trading caused by economic and political instability.

Today, “the main problem is liquidity and lack of buyers,” said Tibor Papp, a spokesman for the exchange’s Securities Trading Committee who admits that “things are not moving as quickly as I’d like.”

In many ways, Hungary’s stock exchange--the nominal market for the country’s $600 million worth of corporate stocks and bonds--is merely a showcase. Only about 5% of all stock trades are conducted at the Tuesday meetings (from a low of $161,300 to the high so far of $483,000); the real buying and selling takes place throughout the week over the counter in bank offices where up to $9 million worth of shares are traded weekly.

A typical Tuesday’s business is three share transactions and 10 bond deals, Papp said. About 60 public limited companies with negotiable shares are listed on the stock exchange, and there is also a small but growing bond market with about 400 issues.

At some meetings, foreign television crews and observers seem to outnumber the traders, who call out bids in a desultory fashion and appear discomfited by the scrutiny. And for those used to Western market frenzies, these traders seem almost medically sedated.

Needs Good Companies

But this is still Communist Hungary, after all, and full-fledged capital markets exist only in the hopeful future.

“The first task is to create companies that are profitable and are good investments. It will take time,” said George Soros, a Hungarian-born money manager in New York who runs the $1.8-billion Quantum Fund there.

Soros recently helped launch the First Hungary Fund, the East Bloc’s first mutual fund, which aims to raise $50 million to invest in Hungarian firms, a much-needed idea in a country where small business loans and credit are virtually non-existent.

No one expects Hungary’s Wall Street experiment to takeoff like Sputnik. Financial experts both inside and outside the country say it will take several years for the exchange to mature and will depend on how successfully Hungary can privatize its state-owned firms and create the infrastructure for a market economy.

The past year has seen sweeping change: New laws encourage Western-style commercial banks and allow private Hungarian firms to hire up to 500 employees. Foreigners may buy Hungarian firms, and anyone may raise capital by issuing shares. In addition, Hungary has introduced bankruptcy laws and has started taxing its citizens, in part by employing the East Bloc’s only value-added tax.

But Hungary’s financial leaders also realize that passing laws is only half the battle--implementing them is much more difficult.

And the stock market’s growth is hampered by the fact that Hungary is an odd mingling of capitalist and socialist economies. For instance, the forint, which has been devalued by 11% in the past year, remains a non-convertible currency.

For investors who want to repatriate their earnings, “that is certainly a major problem,” said Andrew Sarlos, a Hungarian-born money manager based in Toronto who co-founded the First Hungary Fund.

So is the typical Hungarian prospectus, which runs six pages but does not include any of the hard facts that Westerners demand. Another problem is converting arcane Hungarian accounting practices to generally accepted Western methods.

Bought Before News

Then there is insider trading, which Hungary’s stock market mavens view with less concern than their Western counterparts. “We have a small market and with insider trading, at least it’s trading. If we put too many rules, it will kill the market,” Papp said.

He won’t get specific but says that in several cases employees with inside information bought company stock the day before directors announced news that drove up the price.

No action was taken because Hungary has no law to prohibit such actions. Parliament, however, is expected to pass a comprehensive Stock Exchange and Securities Act this November that would squelch insider trading.

“We’ll feel much more secure when we have securities laws,” Papp said. “If companies go bankrupt and investors lose money, it could halt the market.

Another goal is selling state factories to foreign investors who would then issue and trade stock on the Hungarian Stock Exchange. But sometimes, the government cannot determine who owns the firms and is authorized to sell them.

Other times, there are no buyers.

“Maybe if they didn’t put so many dogs on the market they’d have better luck,” said one Western diplomat.

Expect Faster Growth

Hungary had a lively stock exchange from 1861 until 1948, when the country’s new Communist rulers closed it down.

But Hungary, which led the East Bloc in economic reform under longtime leader Janos Kadar’s “goulash Communism,” opened a small bond market in 1983. It has grown steadily, and the new laws will only accelerate that growth.

The First Hungry Fund is the brainchild of Soros and Sarlos, who have retained Bear, Stearns & Co., the New York-based brokerage, to market the fund. Other key players are the private sector arm of the World Bank and Hungary’s central bank.

Small investors need not apply. Investors are asked to contribute $500,000 for five years and are guaranteed that they can recover their initial investment after five years--in hard currency. Most will probably come from outside Hungary. Inside, many residents harbor a distrust of the economy.

Bonds Almost Crashed

And with good reason. The 1987 Wall Street debacle caused dangerous waves on the Budapest exchange and prompted many Hungarian investors to sell their stock, Papp said.

In addition, the bond market almost crashed in late 1987. Hungary’s money managers had sold tens of millions of dollars in bonds to citizens at fixed rates of 11%, a good buy when Hungary’s inflation rate was 6%. But when inflation soared unexpectedly to 17%, the state was forced to step in and repurchase many of its bonds to keep the market from collapsing. Today, the bonds are still 20% off of their face value.

But lured by new business, a number of Western companies have jumped into the financial fray. The Peat Marwick Main & Co. accounting firm is advising Hungarian firms on investment prospectuses and Western auditing practices. Price Waterhouse & Co., which expects to open a Budapest office this fall, has entered into a joint venture with five commercial banks to provide accounting and financial consulting.

Soros, the savvy, high-profile money manager who has poured millions of his own money into promoting Hungarian political reform, cautions that reforms should move slowly or the entire house of Magyar cards may collapse.

While an ardent champion of his homeland, Soros hesitates when asked whether he would sink his own money into shares traded on the Hungarian Stock Exchange.

“I’d have to look very closely before I did.”