Hungarian negotiations with ECB, IMF, and EU: The situation is still fluid

Anyone who thought that Viktor Orbán's government would back down after receiving the European Central Bank's response to Budapest's unilateral decision to decrease the salary of the Hungarian National Bank's chairman and his deputies would have been entirely wrong. As the prime minister said many, many times, one of the problems with the former governments was that they tried "to conform too much." I.e., they didn't tell Brussels or Washington or the governments of a neighboring country to "go to hell; we are going our own way and we pay no attention to your desires. We are an independent lot."

So I wasn't at all surprised when yesterday Péter Szijjártó, Orbán's personal spokesman, announced that the government is still "committed to a new system that distributes the financial burdens equally." In plain language, the salaries of the chairman and his deputies cannot remain what they currently are. However, he added, government "experts" are looking into the document received from Jean-Claude Trichet, chairman of the ECB. By this morning Anna Nagy, the new government spokeswoman, announced that the experts "dispute several points in the document."

It seems to me that the official government spokeswoman is playing second fiddle to the spokesman of the prime minister, Péter Szijjártó, because it was he who finally announced the cabinet's decision this afternoon. According to Szijjártó the decision to cap the salaries of the chairman and the high officials of the Hungarian National Bank was correct. Moreover, it in no way violates the independence of the central bank. After all, he added, salary caps are applicable to all independent institutions, including the supreme court, the constitutional court, and many others. Therefore, the Hungarian government's action is in harmony with the legal practice of the European Union. He added that György Matolcsy informed the chairman of the European Central Bank of the Hungarian government's opinion on the matter. Szijjártó also maintained that the Hungarian government fulfilled all its obligations as far as consultations are concerned. That is especially puzzling because one of the complaints of Trichet was that Budapest didn't negotiate with either the Hungarian National Bank or the European Central Bank concerning the issue. So, now it's the ECB's turn. We'll see whether the continued tug of war between the Hungarian government and the Hungarian central bank will have any negative repercussions.

As far as the negotiations with the IMF and EU are concerned, the situation is not at all rosy. According to observers if there is no agreement by Monday, the forint might be hit again. On the other hand, if there is an agreement the Hungarian government most likely will have to give up some of its cherished ideas in the government's "action plan." The plan consisting of 29 points, including such weighty changes as tax-free pálinka distillation at home, was announced by Viktor Orbán after a harried three-day cabinet meeting.

According to leaked information, the most important demand of the 20-member IMF-EU delegation is that Hungary must publicly commit itself to a deficit of less than 3 percent next year. Apparently such a commitment is especially necessary because the financial panic created by Lajos Kósa, vice-chairman of Fidesz, and Péter Szijjártó when they compared Hungary to Greece cost the country 150 billion forints. Brussels is also insisting on the less than 3% deficit as a result of pressure coming from Germany. And Brussels apparently means business. If the current government doesn't stick to the numbers pledged by the Gyurcsány government in 2008, Brussels will suspend the generous subsidies Hungary is currently receiving.

The representatives of the IMF-EU duo apparently also complained about some of the legislative proposals that seem to make transparency more difficult. The excuse offered by the Hungarian negotiating team was that these proposals came from individual members of parliament and not the government. The obvious question is: who is in charge of the country's finances? Not the government?

Apparently those finicky members of the IMF-EU delegation were also not too thrilled that Viktor Orbán found the soccer finals in South Africa more important than meeting with them. The delegation will be able to sit down with the prime minister for the first time only tomorrow. The members of the delegation, it was reported, also noticed that Orbán was accompanied in South Africa by Sándor Csányi, the president of OTP, the largest Hungarian bank. Csányi was the only bank president who had no objections to the very large bank tax the government demands from the banking sector. According to some of the analysts, the tax will be levied in such a way that it will hit foreign-owned banks much more severely than OTP.

The IMF-EU delegation is dissatisfied with the size of the bank tax as well as with the plan to use some of this revenue to support parts of the financial sector by setting up an institution that would purchase bad debts from the banks. Admittedly such a financial center was established in Ireland, but there were so many bad debts there that without the help of the state the banks would have gone bankrupt. This is not the case in Hungary.

As for the size of the bank tax, the only thing the government is ready to disclose is that they need 200 billion forints this year. It refuses to talk about the future. The IMF-EU delegation apparently demands a clear indication of the size of the tax not only for this year but also for 2011. According to them the bank tax should be suspended by 2012. The government was dreaming about three years of heavy taxation.

In order to meet the demands of the IMF and the EU, the government will undoubtedly have to introduce structural reforms in education, health, and the financing of local governments, however painful these reforms may be. Earlier governments failed even when the changes they tried to introduce only scratched the surface. Investors and international financial institutions welcomed the Fidesz-KDNP's two-thirds majority because they hoped that such a large victory would enable the government to go ahead at last with these very necessary reforms. But Fidesz is unwilling to stick its neck out because its politicians are afraid, and not without reason, of a severe loss of popularity. They remember only too well what happened to Ferenc Gyurcsány, the only prime minister to make such an attempt.

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Odin's Lost Eye
Fidesz and their leader fear only one thing, ‘unpopularity’. All their moves to date have been to suppress any show of dissent. They will not take the bull by the horns and make the necessary fundamental reforms without which Hungary will remain among the ‘Sick Men of Europe’. One should remember the old Hungarian saying:- “Extra Hungariam non est vita. Si est vita non est ita”. Outside Hungary there is no (human) life. If there is, it is not really (human) life! Perhaps I can explain this attitude better by a quotation from a book by Paul Lendvai called ‘The Hungarians 1000 years of Victory in Defeat’. In this quotation Lendvai is himself quoting from the writings of an English traveller, one Julia Pardoe, who said (in about 1750) “The besetting sin of the Magyar is vanity. He is proud of his nation, of his liberty, of his antiquity and above all of his privileges. In short he admits no superior and scarcely any equal –“. There is a picture of the ‘All Highest of Fidesz (and now of Hungary)’ looking at the President of the European Commission (José Manuel Barroso) as if Senhor Barroso was something a dog had… Read more »
Eva S. Balogh

Odin’s Lost Eye: ““After all, the IMF and the EU hold all the cards” **. Yes they do and not only that the previous Prime Minister cleaverly stopped/delayed the uptake of the second part of the IMF loan. Which puts the present mob in ‘manure’.”
That is an excellent point. At the time I didn’t notice this very clever move, but now I think that it was a masterstroke. Obviously, Bajnai and Oszkó know this crowd.

I had heard also that the IMF officials were furious Orban went to the final. It was definitely chutzpah. Imagine Obama flying on the private plane of Jamie Dimon or Blankfein to the Super Bowl. At the ned of the day, I really am not sure Orban cares for much other than football (and the appearance of power). If he really cared about power or the fate of the country, he would get himself stuck in on these negotiations. Anyway, one point. I think the IMF/EU insisting on a 3% deficit for 2011 is a bit ridiculous. I do not see such a further tightening as serving anyone’s interest. That number is now a fetish. If Hungary were to achieve 3.8-4% deficit this year with a some growth, and could take this down to 3.4-3.5% next year with say 2% growth, that would be good enough for the markets and should be good enough for the IMF. What they should not allow is for the deficit to jump way up again. More importantly, the IMF needs to help these guys figure out how to restructure long term all of this private Fx debt. Without doing this, worrying solely about government… Read more »

NWO: ” I think the IMF/EU insisting on a 3% deficit for 2011 is a bit ridiculous. I do not see such a further tightening as serving anyone’s interest. That number is now a fetish.”
I suspect the problem is not the IMF, but the EU Commission. Needless to say I agree generally with NWO, though I suspect very little is achievable this year now, and that something in the 3.5-3.8% range is an achievable target for next year. I think the IMF would be better directing their energies on three issues – (1) dealing with the overall debt burden, (2) asking the government to demonstrate the economic benefits of their tax proposals, because I don’t see any, and (3) asking about what they plan to do about the competitiveness problem and the employment problem.