Blunder after blunder: The latest is economic

If changing the citizenship law was a diplomatic blunder that caused further strains in Slovak-Hungarian relations and some consternation within the European Union, then the irresponsible utterances by Lajos Kósa, Mihály Varga, and Viktor Orbán today concerning the state of the Hungarian economy made even bigger waves. And the Hungarian forint and the stock exchange both took a hit today.

I should call attention to the fact, in case I didn’t mention it before, that Lajos Kósa became the de facto chairman of Fidesz when Viktor Orbán, in addition to his leadership of the party, assumed the office of prime minister. Surely, these are two fulltime jobs, and therefore someone had to be put in charge of the everyday running of the party. Lajos Kósa, one of the vice-chairmen, got the job and this is one reason we hear so much about him nowadays.

I think I should also repeat that Kósa is apt to exaggerate. Mildly put. To say that Gábor Demszky’s twenty years as lord mayor of Budapest caused more harm than 150 years of Turkish occupation or the wartime activities of the Red Army surely cannot be taken seriously. But at least such stupidity doesn’t do any great harm. People just laugh and say: “What do you expect from Kósa? He is like that.” But when Kósa says stupid and irresponsible things about the state of Hungary’s finances and economy and the world doesn’t know either Kósa’s exaggerations or Fidesz’s habit of not respecting the truth, then there is trouble. Big trouble.

Let me also state right at the beginning that I cannot even blame Kósa. He got the job of introducing the theme of continued austerity. Because the economic figures presented by the outgoing government are false and the economic trouble is much bigger than anyone expected, the Orbán government cannot fulfill its promises of large tax cuts and higher salaries for doctors, nurses, teachers, and anyone who depends on government salaries.

Of course, for months one had the distinct feeling that Fidesz’s economic plans included the discovery of “skeletons” that would fall out of the closet once the new government was installed. A committee was set up months ago to look for these skeletons, and it was bound to happen that if the skeletons could not be found a few would be planted here and there.

Almost a week ago, on May 29, Mihály Varga, who headed this committee, said in an interview that most likely during the summer it will be necesssary to change the budgetary figures because it will be impossible to stick with the 3.8% budget deficit. Kósa thought he would prepare the country for that eventuality and explain why Fidesz cannot fulfill its promises. Except in typical Kósa fashion the warning turned out to be an outlandish exaggeration that frightened the market.

According to Kósa, Hungary is on the verge of bankruptcy. The country’s “chance of avoiding Greece’s fate is slim.” Although he admitted that he is not able to support his contention with facts and figures, next week all will be clear about “what on earth we can do.” According to Kósa there is a crisis situation, “the ship is sinking” and therefore immediate steps must be taken. The government can’t just handle the crisis; the whole economy must be placed on new foundations. He casually mentioned that “because of the current crisis it will perhaps be necessary to suspend certain parts of the constitution that deal with the economy.”

Kósa’s knowledge of economics seems meager. Perhaps because he received his degree “in planned economy” at Karl Marx University and the socialist planned economy is a thing of the past. He claims that in Europe “those countries were successful in the management of the crisis that didn’t follow the economic prescription of the IMF and the World Bank.” Hmmm? Greece? Portugal? Spain? Great Britain? And one could continue.

Kósa’s recipe makes no sense whatsoever. He finished his speech by saying that the tax burden of enterprises must be lowered considerably. According to him “it is pointless to ask from what sources this money will  come because at the moment survival is much more important.” Kósa is certain that the Greek example shows that Europe will not let Hungary sink and that the price of the steps Hungary takes will be swallowed by Europe. So, Kósa suggests following Greece’s example in the hope that the European Union will foot the bill.

My hunch is that Kósa heard a few Fidesz opinions or perhaps some discussions about the country’s future possibilities and got mixed up. Because surely no sane person who knows anything about international finances would say such stupid things.

Mihály Varga also decided to open his mouth and repeated that “in Hungary today there is an economic crisis situation.” He repeated again that the budget deficit of 3.8% cannot be maintained; the likely number is between 7 and 7.5%. In brief, it seems that the Fidesz government is still thinking in terms of increasing the budget deficit that would give it greater flexibility with a decided political advantage.

However, I suspect that all this will remain a dream because it is unlikely that either the European Union or the IMF will be game. José Manuel Barroso urged Orbán to continue the efforts of Gordon Bajnai because “consolidation will create trust necessary for economic growth.” He suggested beginning “structural reforms” that are long overdue, not just in Hungary but in other European countries as well.

Orbán’s answer was as usual cagey. Indeed, structural reforms are necessary but “with modification and adjustments we get nowhere.” Hungary needs to take quick and decisive steps that will spur competitiveness. In a few days the information about the real state of the Hungarian economy will be available and within 72 hours the Hungarian government will provide an “action plan.” As for the budget deficit, the government will set it at the “necessary level.” But who knows what the necessary level is, I would ask.

These three gentlemen’s joint efforts resulted in an incredible weakening of the forint. Here is today’s intraday chart.


Analysts attribute this weakening of the Hungarian forint to Lajos Kósa’s irresponsible talk about the country’s bankruptcy and his comparison of Hungary to Greece as well as Mihály Varga’s “skeletons” that are already falling out of the closet in addition to a 7.5% budget deficit. They also mention that the market wasn’t terribly happy about Orbán’s answer to Barroso either because after all the Hungarian prime minister talked about quick and decisive steps toward increased competitiveness and such steps usually increase the deficit.

BUX, the Hungarian stock exchange, also showed the nervousness of market participants. First, the BUX followed the European uptrend, but then the news of the utterances of the financial experts of the Hungarian government hit the market. On the surface, if one compares BUX’s performance today to yesterday’s close, it doesn’t look that bad. It lost only 228.5 points, about a 1% drop. But the day’s range, from the high of day to the close, was about 900 points, or 3%. A good summary of the events can be found in the English edition of portfolio.hu.

All in all, it wasn’t a good day for Hungary. I’m coming to the conclusion that these people really don’t know what they are doing on the global stage. Perhaps after all it wasn’t Gordon Bajnai and Péter Oszkó who were hopeless provincials, as Viktor Orbán claimed, but someone else.

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isti
Guest

ESB: “…changing the citizenship law was a diplomatic blunder.”
The label of ‘blunder’ lies almost squarely on the side of the Slovaks on this issue. At least this is the impression one gets from articles (and comments) from reputable international sources.

Headless
Guest

So here comes the “moral hazard”…Greece got a bailout, so why not us? The sheer clumsiness of these play school politicians is quite breath taking.
As an aside, I think that Hungary needs a weaker HUF to become more competitive. Making cuts cannot promote growth, as that must come from exports. And a high HUF is no help there.

Eva S. Balogh
Guest

Headless: “As an aside, I think that Hungary needs a weaker HUF to become more competitive.”
Sure, but one shouldn’t achieve it that way.

Mark
Guest
Headless: “As an aside, I think that Hungary needs a weaker HUF to become more competitive. Making cuts cannot promote growth, as that must come from exports. And a high HUF is no help there.” Absolutely – and a weaker HUF is moreover inevitable for precisely this reason. But this will force two issues. One is the public sector debt, and the lower Forint will force the government to address the sustainability of its current position that no restructuring of this is necessary. And the second is all of that foreign currency denominated debt that households hold. With a weaker HUF the new government will have to make some hard choices – whether to take a tough line with banks, including OTP, or whether to sacrifice its voter base to the wave of foreclosures that will follow. Kósa is – put bluntly – a fool of the first order, but it is not as if these problems have been invisble; they have been present for a while, and Bajnai could have pursued an economic policy that would have allowed for the orderly management of them. But instead his government preferred the route of neo-liberal stupidity, prefering a policy of attempted… Read more »
John T
Guest

Kósa is a complete cretin and seems totally unaware of how his stupid comments affect the wider markets. So we now have a situation where another political party lied to the electorate to get elected and they are being found out. But they seem intent in making things worse for the people. Sad.

Headless
Guest

Mark:
Well, at least the Hungarians have the luxury of being able to weaken their currency, unlike others who are tied to the Euro.
The last governments efforts (stopping the 13th month wage and cutting maternal benefit) were, as you pointed out, cost reductions, but without any serious structural changes. Not just does Hungary have to deal with this financial crisis, but now is the time to grasp the thorn of the future consequences of an ageing population.
Though my sympathies are limited with regard to FIDESZ for political reasons, they really are caught between the proverbial rock and a hard place.
Without wanting to sound like Cassandra, I cannot find any way forwards, and am beginning to feel that we are now starting down the road of a slow and painful period, with the certainty of a couple of generations lost.
On another note, why can’t this country produce any “statesmen”? Why only rank amateurs?

John T
Guest

On another note, why can’t this country produce any “statesmen”? Why only rank amateurs?
Headless – its a good question and something I’ve commented on too. The trouble is, I don’t see where the new political talent is going to come from, which really worries me.

An
Guest

Headless:
“On another note, why can’t this country produce any “statesmen”? Why only rank amateurs?”
Orban Viktor is the worst thing happened to this country in the last 20 years. His and his entourage represent a political mentality that is toxic. Any credible statesman should emerge that poses a real political challenge for Orban and gang, would be discredited with lies in no time.
This is only part of the story, but a big part of it. The other part is MSZP’s inability to overcome its kadar-ist heritage. And the inability of Hungarian politics in general to move from beyond an aristocratic, provincial view of politics when the ones in power “deserve” special rights rather it would be their job to represent their electorate and do what they believe is best for the country and not for themselves. Hence the emergence of various corruption scandals in all parties (with the exception of the relatively new ones, which never had governing power, Jobbik and LMP)

Alias3T
Guest
Kosa, who, like most of Fidesz’s leadership, isn’t much of an economist, was spouting back two mutually contradictory talking points that are doing the rounds in senior Fidesz circles. One group [Matolcsy] basically wants to carry on with a Bajnai-style austerity programme, the other [Orban] wants to extract more money out of the IMF and the EU to finance a bountiful socialist paradise of low taxes and high welfare spending. Matolcsy is a sort-of economist, Orban is a lawyer. The lawyers are in charge. Where they do all agree is in wanting to talk down the forint, which explains Varga’s comments, and they’d all also like to scare the EU and the IMF into giving them more cash. They’ll get more cash – Hungary was in any case never going to meet its budget deficit target for this year – but it won’t make any diference. The difference between 5 and 7 per cent bearly pays for a 12th-pension, let alone a 13th-month bonanza, and it certainly doesn’t have a meaningful impact on taxation levels. Similarly, there’s no great art in talking the forint down – but what difference will it make? Mark and I have argued about this in… Read more »
Alias3T
Guest

For two or three years we’ve all been waiting for Fidesz to take power and unveil their economic plans. We all swallowed the line that they had a plan but they were arrogantly hiding it from us all, secure in the knowledge that they’d win come what may.
What we’re now discovering is what, on the face of it, was always the more likely explanation: that there isn’t a plan, and there never was. They were so focused on campaigning to win office that they never even bothered to think about what came next.

Eva S. Balogh
Guest

Alias3T: “For two or three years we’ve all been waiting for Fidesz to take power and unveil their economic plans.”
Well, leave me out of it. I certain wasn’t waiting and had altogether very bad vibes about Fidesz’s governing. I think Matolcsy is an idiot, Orbán knows nothing about economics, and the Fidesz leadership thinks that the world can be fooled without any consequences just as they managed to fool the Hungarian voters. Well, it became clear that there are consequences but they are bullheaded to retreat. They charge ahead full force. I’m curious where this is going lead the country.

Mark
Guest
Headless: “Well, at least the Hungarians have the luxury of being able to weaken their currency, unlike others who are tied to the Euro.” Yes, quite. And given that the Euro seems like to lose some of its members, one can hope that we will stop hearing about Hungary’s membership of the Euro as a goal of policy. This is an illusion which the Hungarian economy can really do without. Alias3T: “Similarly, there’s no great art in talking the forint down – but what difference will it make? …. but seriously: which exporters does a weak forint help?” I think this misses the point. Basically it is impossible to see long-term growth being generated in Hungary through government or consumer spending, and therefore it is instead going to come through investment in fixed capital in Hungary. Whether this comes through FDI, through bank lending, or investment by domestic SMEs is irelevant. To be profitable that investment will need to be based in building export-oriented business, and the key to doing that is to maintain competitiveness within the Central European region (Germany, Austria, northern Italy etc.) And to have any chance of doing that Hungary has to reduce its unit labour… Read more »
NWO
Guest

I do not believe the Government wants a HUF Fx rate much north of 270-275. The feeling is that, at this level, Hu exports are fairly competitive, but will not cause immediate wholesale defaults among retail Fx borrowers. The Government also started to understand that the idea of “full conversion” of Fx loans into Huf is a complete non starter. Also, in benign conditions a rate in the 270s, would allow for further interest rate cuts (something that is now for the immediate future off the table).
So what was Kosa doing yesterday and Szijarto doing today? They were trying to talk to a domestic market to prepare the population for the rude fact that further austerity is on the way (a fact that was reinforced to Mr Orban when he was in Brussels yesterday). These guys however do not understand modern capital markets and the impact their words have globally. By doing what they have done, they have actually now put themselves in that much tighter of a bind.

NWO
Guest

More proof that this is not really a clever strategy, but rather more a Marx Brothers type routine. Here is what Szijarto actually said (as taken off the Index web site). They guys are just complete amateurs.
“Miközben az jelent meg, hogy Szijjártó Péter nem tartja túlzásnak az államcsőd lehetőségének említését, az eredeti szövegben a Concorde szerint ez egészen másképp hangzott el: “Gyurcsány Ferenc miniszterelnök volt az, aki csődről beszélt. Sőt, ő büszkén mondta, hogy Magyarország a csőd szélén volt másfél évvel ezelőtt…és büszke volt rá, hogy csak az IMF segítségével tudta megmenteni Magyarországot a csődtől. Ebből a szempontból egyáltalán nem gondolom, hogy túlzás lenne erről beszélni.”

Eva S. Balogh
Guest

NWO: “More proof that this is not really a clever strategy, but rather more a Marx Brothers type routine.”
We have been trying here to come up with rational explanations for this latest move of the Orbán government but it doesn’t matter how hard we try we can’t come up with anything that would make sense.

Mark
Guest
NWO: “So what was Kosa doing yesterday and Szijarto doing today? They were trying to talk to a domestic market to prepare the population for the rude fact that further austerity is on the way” Obviously this is one reading based on an idea of what some people in FIDESZ want to do. I say some people, because everything I hear is that there is no basic agreement between them over what to do. And this seems to confim it. Yes, Varga and Szijjártó seem to have a clear message, but I would have described what Kósa had to say as “babble”. He isn’t the first (or even the most spectacular example of a) Hungarian politician who has said stupid things in the proximity of a microphone, and won’t be the last, but it is worrying. Even if NWO, experience of previous currency crises suggests that this strategy is a house of cards which will depend on extraordinary luck to be tenable. Clearly the test of a HUF270 Euro, will be whether Hungary can produce something approaching 4% growth during the next two years (the figure at which paying down the debt starts to look viable), and whether political stability… Read more »
Mark
Guest

Sorry, I meant to start the last paragraph with “even if NWO is right”

Headless
Guest

Perhaps FIDESZ are playing a game of bluff. Having seen how Greece can get a break, maybe the idea here is along the lines that Europe would not risk contagion by letting Hungary default. Did you see how European bank stocks took a huge hit today after those clowns spoke? I notice that Romania’s bond auction this week was a total cold failure, and Hungary’s was pretty dire. Orban is in desperate need of a cash injection…and desperate times call for desperate measures.
The funny thing is…he might just pull it off! Contagion is the bogeyman….remember, after Hungary comes Spain!

John T
Guest

Headless – There may be a difference in that Greece and Spain are Eurozone members. And I doubt the EU will appreciate that the government has deliberately made the position worse by their comments. I’m wondering if Hungarian politicans have to share a limited number of braincells. There certainly seems a lack of any intelligent thought at the moment.

Mark
Guest

Headless: “Perhaps FIDESZ are playing a game of bluff.”
I think you give them too much credit. They really don’t know what they are doing. Just listen to some of the stupid things they’ve said.
Szijjártó as quoted by Reuters – “In Hungary the previous government falsified data. In Greece, they also falsified data. In Greece the moment of truth has arrived. Hungary is still before that.” (http://www.reuters.com/article/idUSTRE6534NV20100604?feedType=RSS&feedName=topNews)
And Kósa who maintains that they will only decide next week “what on earth we can do about it”.
This doesn’t sound like a cynical, calculated attempt to tell the voters that bad news is coming, and still less to manipulate the EU. It suggests to me a group of people around Orbán who have had an uncomfortable and surprisingly recent meeting with economic reality, who also realize that the anger with the economic situation that consumed the Socialists and the SZDSZ is about to consume them, and they have no idea what to do.

John T
Guest

Mark – I’d agree with you. It also shows a total disregard for the electorate and the welbeing of the country. And the problem is that the key players outside of Hungary can see through this stupid ploy, though I suspect Fidesz actually think they are being very clever. Effectively, they are treating the EU, IMF etc. as chumps. And the bad feeling this is creating is going to be very hard to overcome.
Additionally, the “skeletons” are already known are they not?

NWO
Guest
Having spent a little more time talking with people who are actually closer to FIDESZ, I think the following: (1) There is no economic or fiscal strategy agreed by all the top politicians on how to address the crisis (2) It has been made clear to Orban et. al., that EU has no tolerance for significantly wider deficits (3) As usual, given the above, they are falling back on their old political strategies of saying everything we know are lies created by Socialists (4)These guys literally have no clue about the capital markets, and that their comments actually make them look like fools (5) As for long term debt reduction, I do think they are considering ways to get rid off the near off balance sheet debt (like MALEV) via a Hu pre pack bankruptcy. They are also looking at the pension system and some radical ideas on the health care system (6) Anyway, the bottom line is when you have a Government filled with not so intelligent politicians and without a clearly articulated policy strategy and one still driven by the short term political cycle (as if still in an election), you get nonsense like we have in Hungary.… Read more »
Mark
Guest

NWO: “There is no economic or fiscal strategy agreed by all the top politicians on how to address the crisis”
This is what people are telling me also.

Mark
Guest

John T: “Additionally, the “skeletons” are already known are they not?”
To those people looking at near balance sheet and off balance sheet liabilities, yes, absolutely. The problem is here that because the Eurozone crisis has been much more interesting, the financial markets have been looking the other way. In this context, FIDESZ’s conduct is a bit like waving their arms and shouting: “Over here! We’re in as much of a mess as they are!”

Eva S. Balogh
Guest

NWO:”The irony that this self made crisis overwhelmed their own Trianon day”
Indeed. Imre Szekeres (MSZP) said yesterday evening on ATV that this is an “economic Trianon.”

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