An embarrassing retreat for Viktor Orbán and his government

At  eleven o’clock this morning Mihály Varga had to face the music. He gave a press conference that must have been very difficult: after all, he had to admit that the Hungarian situation in no way resembles that of Greece. Furthermore, there is no question of impending bankruptcy and, after all, the new government will be able to stick to the 3.8% deficit as promised by the Bajnai government instead of the 7-7.5% he was talking about only two days before.

Not surprisingly this was big news and not just in Hungary. MTI’s reporter sent three reports back to headquarters in the course of 45 minutes. He first reported Varga’s earlier accusations that the budget for 2010 “bears little resemblance to reality and immediate intervention will be necessary.” The committee created by Viktor Orbán a couple of months ago reported some “serious false assertions and tricks” and therefore immediate action was necessary. The intervention must be “profound” and “level headed.”  He announced that the cabinet will have a three-day emergency meeting to discuss the government’s answer to the budgetary situation.

What are the tricks and false assertions? According to Varga the tax revenues for the year have been overestimated while the deficits at the state enterprises such as BKV, MÁV, and MALÉV have been underestimated. The two banks in state hands are also in trouble. The losses at these lending institutions are about 100 billion forints.

This was the introduction that was supposed to justify the sad reality that all those promises Fidesz campaigned on cannot be fulfilled. Varga tried to convince the general public that after all this is not their fault but that of the former government. But soon enough he shifted course, saying that “the Hungarian economy is in consolidation.” That is, the economy is not in a downward spiral but is muddling through. He also admitted, without mentioning Lajos Kósa’s name, that comparing Hungary to Greece was unfortunate. He, of course, forgot to mention his own press conference that resembled in content if not delivery Kósa’s speech.

Varga’s references to the budget deficit were vague. The journalists pressed him for more details but in vain. Varga refused to answer. Péter Oszkó, the former finance minister who has a blog and is a pretty responsible blogger, expressed his delight that the new government realized that the former government’s financial policies must be continued. At the same time Oszkó rejected Varga’s claim that some of the figures in the 2010 budget bear no resemblance to reality. There were some items that had downside risk, but the former government put enough money in reserve to cover most contingencies.

Oszkó told Hírszerző that Varga’s committee, charged with combing though the items in the deficit, found not skeletons but chewed up bones. “Skeletons” is a reference to the daily assertion of Fidesz that they cannot say anything about their own economic policy until “all those skeletons fall out of the closets” in the ministries. The repetitious mention of skeletons was indeed a bone that had been chewed over and over again.

Most commentators describe Varga’s announcement of Fidesz’s new economic policy as a complete reversal. If Orbán and Co. had illusions about pulling off the trick of crying poor and hoping to get preferential treatment they were dead wrong. What I don’t understand is how it was possible that they entertained such hopes in the first place. It was clear to everybody even superficially familiar with international finance that the IMF and the EU would not play ball. Among economic commentators László Lengyel was the one who most bluntly expressed his belief that “the market simply will not tolerate” what Orbán’s economic experts cooked up. The market will teach them. Well, their education began even before they had the opportunity to implement their zany ideas.

A friend of mine who knows much more about financial matters than I do suggested that the Bajnai government was clever when it decided not to ask for the second half of the IMF loan. Bajnai and Oszkó didn’t trust Orbán and his so-called economists and didn’t want the new government to mismanage half of the IMF loan for their own political purposes. This way the IMF has leverage while the new Orbán government’s spending is greatly restricted.

Anyone who has any doubts about the influence of Lajos Kósa’s and Péter Szijjártó’s incredibly stupid statements on the exchange rate should take a look at this chart.I might add that the weakness in the forint started right after Fidesz won the elections. See the first green arrow indicating the day of the second round of the elections. The second green arrow corresponds to Kósa’s speech and the third is Szijjártó’s reaffirmation of Kósa’s ridiculous comparison of Hungary to Greece.

If I recall, when Fidesz won the elections in 1998 the Hungarian stock market sold off. Given the size of the market it wasn’t a big deal, international markets barely noticed. This time Viktor Orbán had an international stage and the critics weren’t kind.

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“Most commentators describe Varga’s announcement of Fidesz’s new economic policy as a complete reversal.” They might, but the best one can say is that it is too early to say. In fact, I’m tempted to comment that it impossible for someone who doesn’t know the direction they are travelling in to conduct a complete reversal. I haven’t heard anything from FIDESZ that resembles a strategy – an approach around which they can hang concrete measures. I didn’t agree with Bajnai, but he did have a strategy – this reminds me of the period of Gyurcsány’s premiership between the defeat in the referenda in March 2008 and his final departure. Like Gyurcsány FIDESZ have yet to wake up to that fact that their tactical political games will not substitute for strategy. And we heard from Varga yesterday; I read tonight about plans to cut income tax to a flat rate of 16% have not been abandoned, but are being considered actively by the government. There are differences between Hungary and Greece. Public debt is much lower; the deficit is lower; it has been more transparent than its southern neighbour (even if it has been less than perfect), and most importantly, it… Read more »
Semper Fidesz

The previous government left an empty treasury, maxed out credit cards, huge piles of unpaid bills, and some nasty surprises.
We can solve the impossible right away, but miracles may take some time.
It’s obvious now that the EU is not the solution, it’s the problem. We have to find our own path, build an ark or something, or the Flood will wipe us out. Globalization only works for a handful of people, the rest is getting more and more unhappy with it. Why climb onto a sinking ship?
It’s time to find our real problems and deal with them without selling out the nation.

John T

Semper Fidesz – I think you need to set out your position much more clearly in terms of solutions.
But if you think Hungary can go it alone in the near term, then I would disagree with you – without EU development funds and access to the single market / other negotiated agreements between the EU and other blocks, think again.
Additionally, if Hungary were to leave the EU, then I doubt there will be much goodwill towards the country to renegotiate trading terms etc. As I write this, I’m listening to BBC Business news ,where the Euro has tumbled and the commentators are blaming Hungary for unsettling the markets – Hungary may have changed its position but people are wary of believing the statements. And while the MSZP may be guilty of screwing up the economy, this latest cock up in upsetting the markets is solely the fault of Fidesz, who come across as complete flip-flopping fools.
As for globalisation, actually, many people are benefitting – the difficulty is that its mostly non-europeans.


John T. “this latest cock up in upsetting the markets is solely the fault of Fidesz, who come across as complete flip-flopping fools.”
Couldn’t agree more. But having heard Matolcsy at CNBC this morning, one can only conclude that he and Varga are now in fact acknowledging that they have been lying through their teeth in the past few monthes, just to get elected. Sounds familiar? After many monthes of stating that the Bajnai government figures were wrong and doctored, that there would be huge skeletons and that the 3.8% deficit was not attainable at all, now they suddenly state that those figures were basically right, there are no real skeletons and that they, too, will keep the deficit as agreed with the IMF and EU. See CNBC.
In short, they are doing an “Őszöd”. Interesting to see how the public will react to this one?

John T

Well, watching the evening news tonight, it seems Kósa for one is unrepentent about his comments. What a narrow minded peasant he is. The trouble is it seems that Fidesz are still taking a very Hungocentric view of this mess – if they still don’t realise the trouble that they are causing in the wider market, then I truly worry what will happen in the near term.

Kata: “?” I’m broadly sympathetic to Irwin’s points. In fact the reason Hungary’s budget deficit is over the Bajnai’s government’s targets at all (and everyone is now agreeing that without action it will come in at more than 3.8%)is precisely the result of Keynes’s “paradox of thrift” – in other words by cutting spending the government has cut its own income, negating the value of some of the saving. The Eurozone is engaging in what we might term competitive internal devaluation (a sort of version of the competitive disinflation we saw in the ERM currency regime between 1983 and 1992). In fact because of the way the Euro was set up, the Eurozone is condemned to do this. The only ways out of this are either (a) to integrate the labour market and social security systems, and develop a budget and fiscal policy for the whole zone, or (b) to allow some of the countries currently in the zone to leave, and for the Euro to be a common currency for certain “core” states that consistently run current account surpluses. I’d personally prefer to see the first, but I expect the second of these two scenarios to happen, but not… Read more »

I should have said “these problems will only be broken through some fairly radical measures”.