Dark economic clouds over Hungary

Today was not a good day. The Budapest Stock Exchange (BUX) went down 4.39%. Országos Takarékpénztár (OTP), the only Hungarian-owned bank, lost 8.87%. (Of course, it could have been Citi–which I now call "Village"–with an intraday low under $1.00.) At one point OTP's loss was more than 10% and trading was temporarily halted. The Hungarian forint is steadily weakening. A few days ago when it reached the "psychological barrier" of 300 Ft to 1 euro people couldn't believe their eyes. A few minutes ago when I checked 316.04 Ft had to be handed over if one wanted to buy one measly euro. All those thousands who borrowed in euros or in Swiss francs must be moaning, not without reason. Meanwhile everybody has an opinion about why the Hungarian forint is faring so badly.

The most popular explanation is that Ferenc Gyurcsány himself caused the forint's downfall and the ever increasing crisis when he went to Brussels and tried to sell a program that would have helped the whole East European region. According to his critics he didn't share his ideas with anyone, not even Mirek Topolánek, the current European Union president. However, according to the latest news, that was not the case. Gyurcsány presented his four-point proposal to Topolánek on February 26 (or according to another source on February 24) and surely he must have had Topolánek's okay. However, at the end the Czech prime minister sided with those "proud" countries of Eastern Europe that didn't want to be associated with Hungary and Ukraine, surely the losers of the region. It didn't matter that Gyurcsány kept repeating that Hungary is doing all right and he was asking the money for the whole region–the label stuck. Gyurcsány is described as a pushy guy who always demands something from the European Union and the western politicians are sick and tired of him. It seems that the neighbors condemn him even when he was trying to ease their situation. See a Slovak cartoon. Slovak viewOthers also blame Barack Obama who after meeting with Gordon Brown, prime minister of the Great Britain, said the following: "One of the things that Prime Minister Brown and I talked about is how can we coordinate so that all the G20 countries, all the major countries around the world, in a coordinated fashion, are stimulating their economies; how can we make sure that there are a common set of principles, in terms of how we're approaching banking, so that problems that exist in emerging markets like Hungary or the Ukraine don't have these enormous ripple effects that wash back onto our shores, and we're providing them with some help in a coordinated international fashion, as well."

Well, that did it in Hungary. How does Obama dare to compare Hungary to Ukraine! No wonder that the forint started to fall even more rapidly after that speech. Moreover, it takes gall, these people say, to talk about problems that "will wash back to our shores." After all, where did this whole mess start? Not in Hungary. Hungary is the victim of irresponsibility in the American banking system.

Those who defend Gyurcsány claim that the forint's fall is not unique. The Polish zloty and the Czech koruna have also been trending down. I calculated the loss of these three currencies since October 1, 2008, after the collapse of Lehman Brothers, and found that during that period the zloty fell by 28%, the koruna by 12%, and the forint by 23%. In the last couple of weeks the forint has weakened against the euro while the koruna has strengthened, both by about 4%; the zloty has remained largely unchanged.

According to the latest Eurostat figures Hungarian quarter over quarter GDP decreased by 1%. This is actually better than the European Union's average of -1.5%. The greatest decrease was in Estonia with -4.2%, in Germany -2.1%, in France -1.2% and in Italy -1.8%. But there are still countries in the European Union that are doing relatively well: Slovakia (2.1%), Greece (2.6%), Cyprus (3.0%), Austria (0.5%). Hungary may not be at the head of the pack, but in terms of GDP Ukraine is way behind the pack. (Ukraine is just adopting the Western reporting system, so it's hard to make a clean comparison, but its GDP declined 20% in January year-on-year and, looking at a chart that tries to calculate monthly movements in Ukraine's GDP, it looks as if growth was positive through September 2008 and then fell off a cliff.)

Meanwhile SZDSZ and MDF are standing by the recommendations of the Reform Alliance. According to the reform economists and the politicians who support them the recent unfavorable economic trends could be immediately reversed if the world saw that Hungary is ready to tighten its belt much more than Gyurcsány recommended. Because the government without the SZDSZ and/or MDF cannot pass its own program, negotiations behind closed doors are taking place between the government and the framers of the Reform Alliance.

This morning Viktor Orbán made it clear that the program of the Reform Alliance is totally unacceptable to him and his party. According to Orbán, the Reform Alliance is trying "to fix an economic system that failed. The Alliance's remedy I find wanting. History passed judgment on this economic system. The system itself is defective. There is no use of trying to patch it up. An entirely new system must be built." Although he didn't divulge what this new (post-capitalist? post-global?) system would be, he did say that he would insist that half of banking system be in Hungarian hands. He neglected to tell us where the capital outlays would come from.

It is very possible that MSZP, SZDSZ, MDF, and the members of the Reform Alliance will hammer out some kind of compromise and that a new amalgam bill will pass easily with three-party support. Some people think that Fidesz made a mistake in categorically refusing to talk with the Reform Alliance.

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Mark
Guest
“According to the latest Eurostat figures Hungarian quarter over quarter GDP decreased by 1%” Beware of making comparisons between countries on the basis of these statistics at this stage. Eurostat compiles its figures based on the returns from individual national statistical offices. There is quite a lot of difference in the quality of the statistics produced. Hungary’s statistical office is highly regarded – and its statistics are very good. Secondly they don’t quite measure the same thing. Hungary has reported a quarterly contraction of -1.0%. If you look at the Eurostat tables Slovakia has reported no quarterly contraction figure and its return is left blank on the Eurostat table. Your +2.1% figure for Slovakia is an annualized figure (the actual annualized figure the Slovak statistical office is reporting is +2.5%) – not the quarterly one. This suggests a very sharp slowdown in Slovakia indeed in the fourth quarter, and I would suggest when we have fully comparable statistics, we will see that what is happening there is not disimilar to what is happening in Poland and the Czech Republic. Plus, these early figures are nearly always revised because they don’t reflect all of the data. ” Meanwhile everybody has an… Read more »
nwo
Guest
American banks did not cause the crisis in Hungary. Foreign (mainly Italian and Austria) banks irresponsibly lent too much money at cheap rates in non-HUF currencies. But where does the real fault lie? With the Hungarian Government. The reason banks lent in currencies other than the HUF was because HUF interest rates were too high (the same problem dd not occur in the Cz Republic for instance). And why were rates high? Because the NBH to control inflation and manage the currency (at least until mid last year) had to keep rates high because of the Government’s amazingly profligate fiscal policy. As to today’s situation, the main problem with Gyurcsany’s trial ballon at the EU summit, is that the markets want to first see some sacrifice at home. It is believed that Gyurcsany is trying to internationalize the crisis, so he does not need to admit that the fault lies primarily at home, and the short term cure for the currency problem also rests at home. Everyone has been disappointed as to how the Govt. has managed its commitments post the IMF package. It did the minimum required, and the market is saying this is not enough. With GDP likely… Read more »
Mark
Guest
NWO: “The reason banks lent in currencies other than the HUF was because HUF interest rates were too high” You make some very important points, but what I think is more important was the way in which in 2003-4 Hungary lost effective control of its monetary policy. I’m not sure about controlling inflation – but high HUF rates were needed to fund the exploding debt incurred as the costs of the Medgyessy measures, and the price for stablizing the polarized situation that followed the 2002 elections. I think this was exacerbated by the political split between the MSZP-SZDSZ government and Járai in charge of the MNB. Hungary’s EU entry meant that the markets were optimistic about Hungary’s prospects of joining the Euro, and therefore prepared to invest in its housing market. Furthermore, Hungary had a number of Austrian-owned banks who had used the offer of CHF-denominated mortgages to raise their market shares in Austria already in the 1990s, who saw the opportunity to use the technique on a larger scale to raise their market share in CEE. This combination of factors created a unique situation in which HUF interest rates lost all real relevance for controlling the supply of money… Read more »
Gábor
Guest
NWO, it’s a pretty good narrative and even a coherent one, but a bit onesided and short sighted, as if it had been written by someone from the so-called “markets” so clearly forecasting the economy and so truely assessing the reality through their prices. I’m a bit suspicious of those opinions putting the responsibility solely on Gyurcsány’s shoulder. If we try to order the events rapidly following each other chronologically just to make a difference between effects of the crisis and effects of the governemnts economic policy maybe we will have a slightly different picture. Data from the last year consequently showed that the governments austerity measureas and the tax-hikes produced a budget deficit well under the Maastricht requirement (Although in the last moment the government made some easing, it was a mistake.)Even the public debt – expected to rise in the last year – would have been remained at its level in 2007, had the financial crisis not hit Hungary and force the country to borrow from the IMF and the EU. So far it is no blame to put on the governemnt, even if some interest groups (please, don’t tell me that the organizations of the employers and… Read more »
nwo
Guest

The short term problem is credibility of the Government and a sign of commitment to long term fiscal reform. This is the only thing Hungary-along- can do to try and prevent a full fledged currency meltdown and a collapse of the banking system. It still may not be enough to work.
The long term problem is a huge level of debt to GDP (primarily at the State level) that has funded the welfare state since the 1980s. This needs to be managed. The only way to manage that is outright default (Latin American style) or growth. Even leaving aside the crisis, there is little one can point to that can make one believe there is a strong catalyst for growth in Hungary. Given the strucutral problems in the economy, the long term potential grwoth rate in Hugnary (probably in the 3-4%) is far too low to work off the debt reasonably.

Mark
Guest
NWO: “The long term problem is a huge level of debt to GDP (primarily at the State level) that has funded the welfare state since the 1980s.” This I think takes us to the root of the problem, and the issue here is moral, political and economic – and unless it is directly addressed will shake the political system (an the post-1989 settlement) right down to its foundations. The economic issue is that of the long-term debt trap which has acted as weight on Hungary’s economy since 1989. It played a considerable role in deepening the crisis of the economy between 1989 and 1996, and has limited Hungary’s growth since. As you concede it plays a considerable role in Hungary’s current problems – for whatever reasons all of Hungary’s governments and most established economic opinion has insisted that the precise payment of a debt, that everyone knows Hungary can only pay at substantial long-term cost has been a sacred cow. Why? The political problem is that of the implicit (and in some cases explicit) promise made at the end of the 1980s, that the transition to a market economy would lead to a rapid increase in the standard of living,… Read more »
nwo
Guest
Mark The history is what it is. Hungary, in hindsight, should have rescheuled like Poland in or around 1990. If they had done so and behaved prudently, the country could be far more prosperous than it is today or will be in the future. The problem was that they did not reschedule (out of a mistaken sense of pride and a foolish belief that they would be treated better by the West for honoring their commitments) and the post-1990 Governments never acted prudently. In the end, Hungary is left with an insurmountable debt burden with no reasonable way to escape. Whose fault was this? I think it is really a chicken and an egg question. Obviously, politicians of all stripes-but especially the MSZP circa 2002-2006-are responsible, but the public is responsible as well. Hungarians have asked their politicians for a free lunch. They have wanted the freebies of the welfare state but are unwilling to pay for it. What is terrible is that the run-up to EU accession and in the early years post-accession, the international markets were all to happy to finance the “have your cake and eat it too” strategy. And the MSZP won re-election in 2006 solely… Read more »
Mark
Guest
NWO: “Hungarians have asked their politicians for a free lunch. They have wanted the freebies of the welfare state but are unwilling to pay for it.” My first reaction is to say that this could be said with equal justice about almost any other country – including the UK, the US, Spain, Ireland – that became indebted and faces some kind of adjustment. Have you ever met anyone who enjoys paying taxes? My second reaction is that this isn’t the real problem. The real problems are the continued legacy of the extreme job destruction in the 1990s on health, employability and thus labour market participation. They are also related to a “weak” Hungarian state, and a polarized country, where the transition has failed to deliver the material security and standard-of-living that was expected. My third point back is that politicians of all sides have treated the public like children, and have consistently over-promised. I remember back in the mid-1990s, Imre Dunai, Horn’s Minister of Industry and Commerce on MTV’s Híradó announcing the construction of what is now Duna Pláza, arguing that it represented the first sign of the state of generalized consumer plenty that would be delivered as a reward… Read more »
Odin's lost eye
Guest
NWO As you say when Hungary was accepted and entered the Hungarian people behaved like a children given a free run a candy store. They did so with out really understanding how the capitalist system works or the rules. My late wife wanted to borrow a large sum in Swiss Francs. I said no. She could not understand this nor could she (and never did) understand about ‘servicing the loan’. You also say *** “Any sensible Hungarian parent will make sure his/her children will be able to speak foreign languages. The opportunities are unlikely to be in Hungary” *** I will agree with you about your first point. Very few Hungarians know anything about the outside world. This makes them very lonely which in turn tends to lead them into xenophobia. On your second point about opportunities there are always some form of opportunity where ever you look. It is just a question of finding it and knowing how to exploit it. Mark In your last paragraph you talk about ‘illegitimate governments’ and ‘illegitimate loans’. You say ***.”If Hungary’s current political elites want the population to pay for its indebtedness they have to give a convincing answer to the question… Read more »
Mark
Guest

Odin “Where earlier regimes (be they de-jure or de-facto) borrow money from within or from outside the state then their successors have to pay off these debts.”
Of course, they do (unless, of course, like Poland they re-schedule and re-structure them in an agreed way). But, with all due respect, you have missed the point. My argument is that it is now politically impossible for any government made up any of the present parliamentary parties to demand sacrifices in the name of paying off the debt, and secure any acceptance of this position from the population. In part this is due to the way they have justified their rule in relation to the regime that took on the debt, and in part because people believe that others have profited disproportionately from their positions in that system as the market was introduced(including political elites) and that they should be expected to pay first. Of course, this position is impossible, and it suggests that a systemic political crisis is not that far away.

NWO
Guest
Mark- As gloomy as I can be, I do not believe a systemic political crisis is likely. I also do not see this as politicians v. people (Of course, the populists amongst us (including, sadly FIDESZ) will argue for this. There are still enough Hungarians who understand there are freedoms afforded by the new system and by eing part of the EU that there is no real turning back from this). I continue to believe that while the population was complicit in the pact with the debt devil. As some point individuals need to take some responsibility. In addition, as for the development of the economy, at least until a year or so ago, the most developed parts of the Hungarian economy were more productive and efficient that in other parts of the CEE. This is still the case I believe, as one who spends a lot of time in most of these CEE countries. The problem was that there has never developed a real, thriving SME sector. The reasons are manifold: cost of credit, dependence on export markets (as compared to Poland), tax disincentives, and, subjectively, I believe Hungarians are more risk adverse than people in the neighbouring countries.… Read more »
Mark
Guest
NWO: “I do not believe a systemic political crisis is likely.” Let’s come back in five years and see who was right! Domestically a political crisis has been mounting since 2002 (long before the onset of the economic crisis), and I find it difficult to see how it can be avoided without – at the very least – the disappearance from the political stage of the current leaderships of both FIDESZ and MSZP. Of course, no-one can say how it will happen, and how it will be resolved. The EU could be a factor for stability, but it is either going to be very much strengthened or very much weakened by how it responds to the broader economic crisis. NWO: “Hungary seems not to be able to escape the deadening effect of the State. Sweden or Denmark this country will never be. Instead, Hungary emulates Italy.” I’ve lived in both Hungary and Italy, and I agree absolutely with the parallel. The culture of the state, the patterns of clientelism and paternalism, and behaviour of citizens in the face of that state closely resemble each other in both countries. Th comparison also suggests that changing this will be a very long-term… Read more »
Odin's lost eye
Guest

Mark you mention that *** “a systemic political crisis is likely.*** ”
When an opposition, which is totally out of its depth, but just wants power or the trappings of power behaves in a nihilistic fashion what is left? Any new party or grouping would have to be totally untainted by the past. So I ask again what is to be done?

Mark
Guest
Odin: “So I ask again what is to be done?” This is a very complicated question, and I don’t really think it is as simple as anyone putting together a “plan”. The basic political problem is: 1. Discontent and frustration with the economic situation, and with inequality. 2. Discontent with the incompetence/dishonesty of politicians. 3. A loss of systemic trust in current economic policies/political institutions to get the country where it needs to go. 4. An economic situation – where even in the best case scenario – the standard-of-living has to fall before it can rise. 5. The political system is blocked because both parties are too compromised and lack the authority – in part for the reasons above – to deal with the crisis. Therefore, the problems cannot be resolved through the normal democratic mechanism of kicking the MSZP out and replacing it with FIDESZ. This is an untenable position, and History tells us in these situation something gives – and when it gives, it doesn’t look very pretty. Let’s look at some plausible scenarios (these are not predictions; nothing ever happens quite like this). 1. Everything stays as it is. The economy continues to deteriorate, but outright crisis… Read more »
NWO
Guest

Mark:
There is a lot I agree with in your “game playing” the evolving political situation.
First, despite the fact that FIDESZ leadership is probably too dumb to realize it, the best thing they can hope for is a government of experts and a radical reform program pre-2010 elections. They should be working with MDF and SzDSz for this right now.
Second, if radical reforms or a financial crash exacerbates societal tensions and increases the prominence of radical elements in the society, I believe the financial and political elite in Hungary have too much vested in the current system and ties with the EU to allow the radicals to actually find a way to power. The middle would-despite the mutual hatreds on both sides of the political divide-come together in some compromise to keep the radicals marginalized. Not even the Hungarians would allow themselves to be forced out of the EU. It may be really unpleasant. There may be a lot of street activity. The anti-Roma and anti-Semitic rhetoric would increase substantially, but I believe the center would hold. Sadly, this may have to happen as a more gradual transition gets harder by theday.

Mark
Guest
NWO, Your picture is a very plausible one, and you are right to suggest elements that still remain positive. You put stress on the attitude of the financial and political elite and this is of course important – there is another potential stabilizing factor which is the widespread dislike of all falls of extremism among the population – right-wingers, as well as left-wingers. To some extent already the political influence of the radicals has been limited by the opposition of the silent majority in Hungary, so that shouldn’t be left out of the equation (though the greater the economic dislocation the more this will become strained). However, there are two potential factors which would de-stabilize your scenario. One which is a potential one (who knows what might happen), and the other which already exists is very serious. The potential one is that we don’t know what will happen to the cohesion and unity of the EU, and, therefore, how much ability they have to prevent unwelcome political changes in any member state. Though, at present, it is possible to suspend a member from EU decision making(as with Austria in 2000), I’m pretty sure that outright expulsion would be virtually impossible.… Read more »
Mark
Guest

Well, according to news agency Reuters: “Slovakia’s industrial output fell by 27 percent year-on-year in January, the worst reading since the current data series began in 1999, compared with an 18 percent decline in December and worse than a market prediction of a 24.4 percent fall.”
So much for the notion then that Hungary would have avoided the current crisis had it accepted the advice of Bokros et al. and copied its northern neighbour.

Andras
Guest
These are difficult time for any democratic system. The impact of the crisis is so deep, that in many countries, the democratic system would be under tremendous pressure. There is simply no easy and good solution. Every democratic governments would be under enormous pressure to deliver – and would not able to deliver for long time anything else than blood and tears. In this situation, I think the best strategy is honesty. Only honesty could ensure realistic expectations on the long run from the electorate. And there is no other solution, than try to trust the “wisdom” of voters. Provided we believe in democratic system, and we don’t want to have a kind of enlightened reform dictatorship, or revolutions etc. Gyurcsany government is under extreme pressure. It lost much of her credibility both at home and at for the outside world. It is still able to govern, but it is weak to implement any major restructuring program. It is weak not only because of FIDESZ, but because it is lacking the unity and the strength within the government, within MSZP. It is under double pressure: the electorate do not want any major cuts, while the external world (those who are… Read more »
Odin's lost eye
Guest
Mark you say *** “FIDESZ as an organization, however, is clearly subordinate to Orbán’s ambition which is to secure his own political role in the long-term” ***. This is only too true. Orbán’s control over his party machine, as I see it, is total. He has tried to crush all who stand in his way, remember his attempts to destroy MDF and Fidesz’s involvement over the machinations of the security/intelligence company. My great fear is that neither Orbán nor any of his close supporters really understand the mess that Hungary is in. His latest ramblings reported above show this. They are all hot-air. I feel that his own personal aggrandisement is all that matters to him. As far as he is concerned Hungary can go to ‘hell in a handcart’ so long as he is the great and adored ‘All Highest’. The only hope is for someone from another party to stand up and tell the Hungarians in words they can understand just how big a mess they are in and then say “Never mind whose fault it is. How do we fix it”. The problem with that is Orbán would crush that person. When he becomes the ‘All Highest’… Read more »
Mark
Guest
András: “And of course, we have FIDESZ, and the policy line of FIDESZ makes impossible any co-agreed structural reform.” It isn’t the policy line of FIDESZ that is the problem. OK, at the moment they are trying to convince everyone they are a national-populist party (though this is more about stopping Jobbik winning votes in June, than anything else), but I suspect they could very easily declare once elected that they agree with every suggestion the Reform Alliance make! The problem is really that FIDESZ has no coherent ideology, or value system (it can be only be identified as right-wing because of its anti-Communism and nationalism), because it is primarily a vehicle for advancing the personal power of its leader, and those immediately around him. Orbán’s problem – as should have been obvious from his disastrous performance in the 2006 election campaign – is that he badly wants to rule Hungary, so badly, in fact, that he can no longer explain to the population clearly why they should allow him to, and probably he himself doesn’t really have a clear answer to that question other than a belief in his mission as a leader. What FIDESZ wants is to be… Read more »
Mark
Guest
András: “I think the best strategy is honesty.” In general – of course it is. But, if someone has telling lies for a very long time, and then turns to the path of truth, one has to face the issue of why anyone should believe them. There is a silly little problem that is used to teach elementary logic. An Athenian runs past shouting “All Athenians are liars!” Can you believe him? This is very obviously Gyurcsány’s problem – but it is also the problem of the whole political elite post-1990 as well (that Gyurcsány made this point in a self-serrving way to avoid taking the individual responsibility for his own misdeeds, doesn’t make it any less true). And the lies go very deep. The scale of the current political problem is imagining what the reaction would be if politicians started telling the truth about their past lies. In one of my files I have a copy of an article published in the Financial Times on 23rd March 1990, two days before the first round of the first free elections. The article is interesting for it presents an assessment of Hungary’s economic prospects after state socialism. A number of Hungarian… Read more »
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