The IMF and ECB loans and Hungarian politics

The first surprise was the size of the package: twenty billion euros. The initial guess that appeared in Forbes magazine was about half that amount.  Apparently each country has an IMF quota, and twenty billion euros is ten times that of Hungary's. Naturally the two political sides in Budapest interpret the generous loan offer entirely differently. The government claims that receiving a line of credit of this magnitude shows the lending insitutions' trust in the country. Fidesz emphasizes how serious Hungary's economic and fiscal difficulties are if the IMF and ECB feel compelled to offer that much money. For good measure Viktor Orbán and his former minister of finance, Mihály Varga, repeat at least ten times a day that even applying to the IMF for a line of credit is "the greatest shame" for which Ferenc Gyurcsány is solely responsible. It especially hurts Hungarian pride (and says a lot about the superiority complex of its inhabitants) that Hungary is mentioned alongside Ukraine and Pakistan. Or some South American country! Orbán went so far as to say that Hungary could perhaps ask for admission to the Union of African States. All that sounds pretty bad to my ears, but perhaps I'm too sensitive.

The other good piece of news is that the loan was given under very favorable terms. No one knows the exact number, but people talk about 5-6%. The yield on Hungarian government bonds is twice that amount, and some of Hungary's outstanding loans most likely carry a much higher interest rate. I don't know whether the government is planning to pay off some of its more expensive loans with cheaper money that could be called down from the IMF. In any case, for at least two days everything looked good: the forint was strong and the Budapest Stock Exchange followed suit. Today, in the standard two steps forward and one step back scenario, the forint started falling again and the BUX had a bad day. The forint was not the only currency in the region to fall; the Polish zloty and the Czech koruna also had the same fate.

World markets are not trading on fundamentals. There's a global deleveraging and a flight to safety. Hungary is caught in the maelstrom. Sooner or later the forint and the stock exchange will settle down, I'm sure, but the spillover of the global slowdown into the Hungarian economy has already begun. Today General Electric, which employs about 15,000 workers in Hungary, announced that it is letting 500 workers go. Of its nine factories one will be closed.

After the government announced a freeze on salaries of state employees for a day there was stunned silence, but in no time the trade unions regained their voice: they threaten with strikes. And just think about it: from doctors to teachers to firefighters and policemen. They don't understand why "the people have to pay again."  As if there were any other way of saving money. The president of the Hungarian Medical Association is mighty upset, as he is even under normal circumstances, and is asking President Sólyom and the president of the Hungarian Academy of Sciences to set up an "independent committee" to look into whether it is necessary to ask for a loan from the IMF. The pensioners are not very happy either: they don't understand why the pensioners always have to sacrifice when they worked so hard all their lives. It is interesting to listen to people who call into talk shows. They built up the country after the war and after 1956 … and now what is happening to them? I'm not a heartless person but I would like to point out that the official retirement age is 62 and most of the pensioners retire before that age and therefore they couldn't possibly have built up the country after the war. Most likely not even after 1956. Perhaps their parents, but not them.  But it sounds good.

What would Fidesz do instead? According to Mihály Varga they wouldn't have turned to the IMF but would have taken the five billion euros from the European Central Bank and immediately given that money to Hungarian small and medium-sized businesses. In plain language, they would have enlarged Hungary's national debt by five billion euros. Somehow I don't think that the international business or banking community would be too thrilled with this solution. Another suggestion Varga somewhat reluctantly made was to halt infrastructure projects. They would stop building the metro in Budapest and expanding Hungarian superhighways. After all, some Hungarian highway projects were contracted out to non-Hungarian firms, and there's no reason to see money flow out of Hungary. But even these projects rely heavily on local businesses and their workers. Soon enough not only the 500 GE workers will be out of work but all those guys working on the highways. Plus the future development of such cities as Pécs would be jeopardized because of the lack of modern infrastructure reaching it and its environs.

Another gripe of Fidesz is that the government negotiated with the European Central Bank and the International Monetary Fund in "secret." They should have discussed everything with the parliamentary parties and only after agreement should have approached the two monetary institutions. The very idea is absurd. First of all, the government had to act immediately to stop the hemorrhaging. Second, if agreement had to be assured prior to negotiation I am absolutely certain that no such agreement could have been reached thanks to the customary Fidesz attitude toward compromise. In brief, Hungary could have ended up in  bankruptcy. But I guess this eventuality would have suited Viktor Orbán who then could have appeared as the savior of the country.

By the way, an interesting development. In the last two or three days two opinion polls were published: although Fidesz is still leading, both polls show a 6-7% gain for MSZP. SZDSZ and MDF are languishing at 1-2%.

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“There’s a global deleveraging and a flight to safety. Hungary is caught in the maelstrom. ” SO it was or wasn’t Orbán and the conspiracy theory? It’s now back to just Hungary being catch in the net of a larger spider, not some home grown cannibal? Let’s face it, the main problems were not and are not planned to be dealt with – reducing the size of government. The state run companies should be sold off so that the unions will be silenced, the workforce can be disciplined and the government can raise much needed cash in the short term. If need be do this is the idea of copying the UK’s favorable share deals to the populace – as had been planned. Just get on with it and silence the unions and wingers alike. The forint deserves to be where it is and to slide further because the underlying structural problems have not been addressed. This time last year the exchange rates were much less favorable and nothing has fundamentally changed so they should return to those levels. Hungary should be grateful that it got cheap loan repayments for 10 months. The IMF should have made them suffer longer… Read more »