The Hungarian economy, the IMF, and Fidesz

Today is an important day in Budapest. The economists and financial experts from the IMF and the European Union responsible for Hungary, who spent the last ten days in the Hungarian capital, summarized their assessment of the situation. They have been studying the Bajnai government's 2010 budget, looking at every item with a magnifying glass. They wanted to ascertain whether the Hungarian government satisfied the requirements the two organizations demanded when a very substantial loan was granted to the ailing Hungarian economy. A sigh of relief. The IMF and the European Union are satisfied. Hungary managed to reduce its budget deficit below 3.9% despite the severe economic crisis. It was noted with satisfaction that because of this prudent fiscal policy "the trust of the investors increased and Hungary now is capable of financing its needs from the money markets." However, they added that this strict austerity program must continue because the goal is a deficit that is under 3% by 2011.

James Morsink, head of the IMF delegation, announced that "the Hungarian economy has stabilized and is on the right track," but he warned that "further measures will be necessary to decrease the national debt from more than 80% of the GDP to 65% in five years."

At the same press conference Morsink announced that they had talked with representatives of the opposition parties just as they had during their last visit three months ago. He said that Fidesz indicated that they want to cooperate with the IMF and they are perfectly aware of the importance of a disciplined economic policy.

Let's see how Morsink's words were translated by Mihály Varga, who also gave a press conference. "Not only inside of the country but even outside Hungary's borders people are looking forward to change in Hungary." This is clear, Varga continued, from the press conference of the delegation of the IMF. According to Varga the IMF "sees a possibility that because of the economic policies of the next government, Hungary's national debt can be reduced from 80% to 65% of the GDP in five years." Please compare the two sentences. That's called Fidesz communication. And because James Morsink will not correct Mihály Varga (most likely he doesn't even know what Varga was saying in Hungarian), it will stand uncorrected.

Varga's interpretation of what transpired between the delegation of the IMF and the representatives of Fidesz also diverges. When journalists asked him about Morsink's statement regarding Fidesz's willingness to continue the present government's strict fiscal policy, Varga claimed that they "made clear to the IMF delegation that they will be able to give a realistic scenario in this regard only when they know all the details and when all the budgetary information is at their disposal." Hmmm! I simply can't believe that such a statement would have satisfied the IMF delegation, especially because three months ago both James Morsink and Barbara Kauffmann, head of the European Union delegation, made it clear that they wouldn't tolerate a budget deficit of 7% that Fidesz was suggesting.

For the time being Fidesz is trying to counterbalance the good news with some bad. According to Magyar Nemzet, Credit Suisse just published a list of countries ranked by perceived country risk. Hungary is the third riskiest country "in the whole world." Only Iceland and Greece are riskier. (A sidenote here: Credit Suisse analysts used six economic indicators as well as credit ratings and CDS spreads to determine riskiness. If we look only at credit default swap spreads, which is a good measure of investor perception of risk, Hungary fares better, as the IMF and EU representatives indicated. Leading the pack in CDS spreads is Argentina, followed by Ukraine, Iceland, Latvia, Greece, Lithuania, Egypt, and then (tied) Hungary and Romania. Hungary's BBB- credit rating hurt its ranking considerably since this measure was given a 21% weighting. By contrast, the so-called PIIGS–Portugal, Italy, Ireland, Greece, and Spain–had credit ratings of A+, A+, AA, BBB+, and AA+.) Thus "the economies of these three countries are still catastrophic." As far as the risk of bankruptcy is concerned, Hungary is high on the list, right after Latvia and Lithuania. One cannot be proud of the relatively low budget deficit "because Bulgaria, Poland, and even Kazakhstan and Argentina are ahead of Hungary." (But again, look at the PIIGS: -8%, -5%, -12%, -13%, and -12%.) Varga made sure that he included that piece of information in his press conference. In case Hungarians are too sanguine with the results the Bajnai government achieved, Varga in fact claimed at the same press conference that "the government deepened the crisis instead of alleviating it." In order to remedy this "there must be an economic and political change."

I'm getting very confused. We hear from the IMF and the EU that Hungary is doing splendidly and in fact the government's projection for this year's GDP was revised from -0.3% to -0.2%; we hear from Varga that the economy was mishandled. From the IMF we hear that Fidesz promised to continue the austerity program while Varga claims that economic and political change is necessary in order to get out of trouble. I have the feeling that this "confusion" in Fidesz communication will continue in the next few months. 

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“I’m getting very confused.” I’m not surprised. This is the basic situation – in this year Hungary’s economy is going to contract, and though it will be a much smaller contraction no-one really knows how much and this is why the IMF says in its press release that to meet a 3.8 percent budget target “will require strict expenditure control and—to insure against risks—a cautious use of budgetary reserves and readiness to take additional action if necessary. In 2011, additional measures will be needed to reduce the general government deficit to below 3 percent of GDP and put government debt firmly on a declining path.” ( Contrary to what you say in the post no-one knows what the real level of GDP contraction and the deficit in 2009 were (a preliminary figure has to be reported by the Hungarian authorities to Eurostat by 1st April, and a final, accurate figure will not – in all probability be known before October). But that aside ….. The prediction of a small contraction in 2010 (0.2, or 0.3) is premised on rising demand for exports on the back of growth in the Eurozone, especially in Germany. However, the fourth quarter Eurozone figures are… Read more »

Fidesz is a hybrid party, which includes within itself western-style small government conservatives, as well as etatist right-wingers, and even a small handful of former communists (see Pozsgay). As such, all communication coming out of Fidesz will be muddled, contradictory and entirely vague, so as to ensure that all wings of the party are appeased. Saying much more, or actually providing a clear program would likely strengthen and embolden Jobbik, which is now Fidesz’s main rival in much of rural, small-town Hungary.
On a related topic, I am running a poll on my website, which examines party affiliations in Hungary, less than two months before the elections.

Eva S. Balogh

Christopher: “I am running a poll on my website, which examines party affiliations in Hungary, less than two months before the elections.
The Jobbik leads at the moment. I assume that the majority of the readers lives in Canada.


I would like to read the CS report, but for sure some of the data (as quoted by Magyar Nemzet) is spurious. Poland for example will post a budget deficit in the range of 6% of GDP for 2009, in large part due to having (like most of the world) primed its economy through deficit spending.
More generally, I agree with Mark (to the limited extent) that it seems to me that FIDESZ on the whole will continue the tight fiscal policy strategy (hopefully with some further cuts in a wasteful state administration and pension reform coupled with tax relief) regardless of the mixed messages they are sending out now.

Eva S. Balogh

NWO: “I would like to read the CS report, but for sure some of the data (as quoted by Magyar Nemzet) is spurious.”
I couldn’t find the whole report but here is a chart:
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