IMF-EU negotiations became a political football

Well, I was wrong yesterday when I predicted, on the basis of a news item in Magyar Nemzet, that the Orbán government would think things over during the weekend and that Matolcsy and the prime minister would come to their senses. On the contrary. They decided to stick with their original decisions. Moreover, they instructed the party hacks to turn up the volume and use the failed negotiations to their political advantage.

While the Budapest Stock Exchange (BUX) fell 2.9% and the Hungarian forint weakened further by almost 3%, the political machine began its work in high gear. The failed negotiations were portrayed as the struggle between a virtuous David (Hungary) and the wicked Goliath (international financial interests represented by the IMF and the EU). Those who criticized the Hungarian government for its mishandling of the negotiations and bringing financial disaster to the country were practically labeled traitors to the national cause. Jobbik, on the other hand, not surprisingly, is giving full support to the government's efforts "to regain [Hungary's] national sovereignty." Moreover, they consider the break with the IMF-EU only the first step "in the economic war of independence."

The clash between Fidesz/Jobbik and MSZP took place in parliament. Attila Mesterházy (MSZP) pointed out that the Orbán government within forty-two days managed to devastate the forint. According to him, this is a world record that will be difficult to surpass. He claimed that with this mistaken policy the government managed "to take 300 billion forints out of the pockets of Hungarians." He compared the government's attitude toward the bravery of a blind horse heading toward a brick wall.

The first answer to Mesterházy came from János Bencsik, one of the seven (I'm not kidding!) undersecretaries who carry the burden of implementing György Matolcsy's economic ideas. There are undersecretaries in charge of specific areas of the economy, for example, taxation, but Bencsik is simply called "undersecretary," I guess, of general competence. Because György Matolcsy was busy giving interviews and traveling to Austria to answer uncomfortable questions from the Austrian economic minister and the representative of Austrian banks, it was Bencsik who spoke for Matolcsy in the House. Bencsik claimed that the IMF-EU delegation demanded new austerity measures, but the representatives of the Hungarian government made it clear to the negotiating team that the government "had neither the opportunity nor did it find it necessary" to follow their advice. He emphasized that although the state of the Hungarian currency is important, the "situation of the population" is even more so. What Bencsik neglected to say was that the drastic weakening of the forint negatively affects the economic well being of 1.7 million people who took out loans in foreign currencies. Bencsik further made it clear that regardless of what the IMF thinks of the infamous "action plan" and its 29 points presented by Viktor Orbán, it will not be scrapped. He pretty well indicated that the IMF will change tactics because it will notice the beneficial effects of the Hungarian strategy.

Bencsik was quite polite, but János Lázár, the head of the Fidesz caucus, was less so. He is a rough and tumble kind of guy who is just perfect for his job. It is practically a must that the head of the Fidesz delegation speaks and acts in a way that would be perfect in a country pub but not quite acceptable in polite company. János Áder, long-time head of the Fidesz delegation, was that kind by nature and although Tibor Navracsics who followed him in the post was not, he learned the required style in no time. So, when Lázár rises to speak one can't expect niceties. According to Lázár, MSZP decided to side with the banks against the penniless little men. As far as the banks are concerned, they had "eight years of extraordinary profits" and therefore it is time for them to cough up the money. The mention of "eight years" is designed to make MSZP responsible for the profitability of Hungarian banks and therefore the scapegoat of the current situation. After all, Hungarians absolutely loathe the banks and the bank tax is a very popular idea. Of course, these people don't understand the complicated relationship between the banking system and the economy. The only thing they see is that the banks have lots of money and they don't.

Once Lázár started his harangue he was on a roll and added more and more insults. In the name of the Fidesz parliamentary delegation he asked the government "to stick to its guns" and make sure that András Simor, the chairman of the Hungarian National Bank, will not get his full salary by September. He found it rather strange that the IMF-EU delegation came to Hungary to battle for the salary of the bank chairman instead of wanting to help the Hungarian people. If the bank chairman "finds it difficult to live on only two millions forints a month there are millions of people who could give him detailed personal advice on how to live more frugally."

Lázár obviously was instructed to pound home the theme of the evil bankers and financiers in general, so he threateningly repeated several times that there will be a bank tax not only this year but also in 2011 and in 2012. At the press conference he gave after the meeting of the Fidesz delegation he continued the populist rhetoric that the party and the government "will in no way extract more money from those people who were stripped by the socialist government down to their underwear." (For "extracting more money" he used the word "sarc" which implies unfairness. As for the underwear, he used the expression "gatyára vetkőztetni," which is a somewhat coarse way of saying that someone was robbed.)

This kind of talk is not only cheap populist propaganda but it has nothing to do with reality. The problem was not that the socialists took money away from the population but just the opposite. Real wages grew faster than productivity and the gap was filled by foreign loans. The current government, by demanding money from the banks, is not defending the penniless;  it needs the money to hold on to the promise of the 3.8% deficit. And why is this extra money necessary now when only a few months ago it wasn't? Because the tax breaks that were introduced by the Fidesz government and will be voted on within days and that decidedly tilt in favor of the well-off segment of the population left a 200 billion forint hole in the budget. Once the government figured out the cost of the tax breaks they came up with the magic figure the banks and insurance companies were supposed to pony up. A strange way of preparing a budget.

It looks as if the Fidesz government is hoping that the "markets will calm down," especially since it seems that Fidesz politicians are convinced that the financial institutions themselves are responsible for the turmoil in the currency and CDS markets. They believe that the banks by way of the markets are putting pressure on the Hungarian government. So, I guess, once these financial institutions realize that putting pressure on Budapest is a waste of time and money they will stop influencing the market. At least this is what I gathered after listening to János Lázár on ATV's "Egyenes beszéd" tonight. I guess I don't have to point out that this whole theory is nonsense and only shows the ignorance of men like Lázár about the workings of the international financial markets.

So, for the time being Budapest is not going to move from its current position. Unless, of course, it is forced  either by market forces or by further pressure from the IMF and the European Union. Viktor Orbán will visit Angela Merkel on Wednesday. Perhaps she can change his mind with a little nudging. Like the possibility of Hungary losing the benefits of the Union's convergence program.

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Phil Sage

“He claimed that with this mistaken policy the government managed “to take 300 billion forints out of the pockets of Hungarians.”
Attila Mesterházy is a fool. The foreign currency mortgages have been unsustainable for a long time. CHF being exchanged for forints and used to purchase housing has boosted consumption and deferred, but certainly not extinguished the day of reckoning.
“the drastic weakening of the forint negatively affects the economic well being of 1.7 million people who took out loans in foreign currencies” Those people are reaping what they sowed, give it another few years and the banks will experience the mass defaults they deserve.
I interpret the bank tax as simply a transfer of the cost from the banks to those wealthy enough to own property and have a currency mortgage.
My sympathy is certainly with Fidesz on that. Irresponsible banks allowed naive borrowers to take on currency risk they were not financially or educationally capable of understanding.
Falling out with the IMF is the best thing that could have happened to Hungary. Currency will devalue and it will become more attractive to German companies to invest in as their businesses recover.

Odin's Lost Eye
I thought at the very beginning that the ‘negotiations’ with the IMF and the European Central Bank were a ‘put up job’. I suspect that the demands made by the Hungarian negotiating team were probably totally unacceptable to any banker, let alone the ‘Lenders of Last Resort’. They were intended to fail or if the IMF/ECB just ‘rolled over’ and agreed Hungary would make more outrageous demands. The breakdown will give the ‘All Highest’ of Fidesz (Orban Victor) several levers he can pull. These are:- Firstly He can say that negotiations are continuing. Secondly He can say that the IMF/ECB have given Hungary more time to prepare the necessary figures. Thirdly That the IMF and the ECB are arguing amongst them selves. Fourthly He can start a hate campaign against the IMF, the ECB, the EU (most Hungarians do not know the difference between the European Commission and the ECB). Hate campaigns are, as we have already seen something Fidesz is very good at. He will extend this to all bankers (except OTP). The plan is to merge all banks in Hungary into one (OPT). I suspect that the end of this campaign will be the threat that Hungary will… Read more »