This afternoon foreign correspondents sent enthusiastic reports to London and New York: at last the Hungarian government realized that they have reached the end of the road. György Matolcsy announced this afternoon that the Hungarian government will no longer try to get a "better deal" from the European Union. It will bow to the European Commission's demand and will keep the budget deficit under 3% in 2011. Reuter's correspondent called Matolcsy's announcement a complete U-turn. But is it?
Last night after we learned about the unyielding position the European Commission took toward Hungary's deficit, I said that I would have liked to have been a fly on the wall during the meeting of the foreign ministers when Matolcsy suddenly realized that there was no more leeway. The members must meet the centrally prescribed numbers or "there will be severe sanctions." All the sanctions contemplated are serious indeed. According to Matolcsy, Germany wants to suspend the voting rights of those countries that don't meet the target, while others suggested stopping payments to them altogether, including agricultural subsidies. If Hungary doesn't oblige, the new Széchenyi Plan may be down the drain; the government's stimulus program may be stillborn.
I also said that I would like to have listened in on the telephone conversation that must have taken place between Matolcsy and Viktor Orbán. How accurately did Matolcsy report the contents of the conversation between himself and the commission officials and fellow finance ministers? What did Orbán say? He is most likely still madly trying to figure out how to administer the bitter medicine to "the Hungarian people." How can he tell them that Hungary's financial independence is not for real, that it is no more than a pipedream? I'm not sure whether he has come up yet with the right answer.
If I were the correspondent for either Bloomberg or Reuters I would be more cautious in assessing how positive Matolcsy's announcement actually is. A careful reading of the summary MTI gave of Matolcsy's press conference shows that conditions are attached to the promise to keep the budget deficit under 3% in 2011. The first condition is that this year the deficit will be no more than 3.8%. But we know from Ollie Rhen's letter to Edit Herzog (mentioned a day before yesterday) that at the moment the deficit hovers around 4.2% and the commissioner doesn't know how Hungary is going to reduce that number.
The second condition is the extension of the bank levy into 2011. Again, we know that the European Commission is rather leery about the very high tax levied on Hungarian financial institutions. Elli Rehn was worried about its negative effects on the banks as well as on economic growth. At the end of his press conference Matolcsy did mention that the finance ministers talked about the "introduction of a common bank levy but there is no agreement yet." Well, if there ever is a common bank levy it is very unlikely that the Union as a whole will agree to Hungary's rate (0.7% of the GDP). And it's possible that the Union will follow Germany's lead in setting aside the collected tax for a rainy day in case the banks have to be rescued again by the government. If the bank taxes are standardized, I wonder whether Hungary can use 200 billion forints (or some reduced sum) to help fill the gap in the country's budget.
The third condition is a 2.5-3% economic growth in 2011 that would bring into the state's coffers an additional 150-200 billion forints. Considering that at the moment financial experts predict an economic growth of 0.8% for 2010, it's not baked into the cake that such a fairly hefty growth is attainable for 2011. And what happens if "the third condition" cannot be achieved? Will the Hungarians just say: "Sorry, but our economic growth is not as robust as we expected. We can't hold to the less than 3% budget deficit"?
The fourth condition is a cheaper state. Well, that does depend on the government, but for the time being I don't see any signs of decreasing the bureaucracy or the expenses of running the government.
The fifth condition is "making order around the state enterprises." I assume that means the reorganization of some of those state-owned firms that year after year gobble up incredible amounts of money. Of course, that may add to unemployment, which might not be a very popular move. The most logical place for the Hungarian government to start would be the Hungarian Railways. But in the last few months the government was almost forcing MÁV to spend more of its nonexistent money. For instance, the Bajnai government closed certain lines where there were practically no passengers for years on end. The Orbán government has already reopened a few of them and has promised further openings. The Post Office under the old management was actually profitable, mostly because in small villages with very little traffic post offices were closed and services were provided by mobile post offices. The Orbán government promised to reopen them. I'm just hoping that the streamlining of state expenses will also involve stopping all that nonsense.
As for another IMF loan, Matolcsy announced that Hungary has no plans to take out a precautionary loan. It will go it alone. I assume this is meant to be Hungary's declaration of financial independence. But it is costly rhetoric. At the moment bond issuances are very expensive due to high interest rates and often the auctions are undersubscribed. Hungary could receive better terms from the IMF. Moreover, investor confidence could be boosted by such a safety net. If Hungary has agreed to meet the IMF's terms, why not take its money?
The Hungarian forint did better against the euro after Matolcsy's press conference. Before the announcement it was 290 to 1 while right now it is 287. But the question is: for how long?