Lajos Kósa, one of the vice-chairmen of Fidesz, member of parliament and mayor of Debrecen, has a way with words. An unfortunate way. You may recall that he managed to create an international panic at the beginning of June when he compared Hungary's financial situation to that of Greece. As I mentioned, Kósa to this day refuses to recognize that he made a mistake. Moreover, according to him, the financial panic had nothing to do with his and the prime minister's spokesman's words. He just told the truth.
Lajos Kósa attended Karl Marx University (today Corvinus) but never received his diploma because of his involvement in politics–he is one the founding members of Fidesz which became a political organization in 1988. He never wrote his "senior paper" (in Hungary they have a fancier name for it). How much economics does he knows? I have the feeling mighty little, especially because his "field of concentration" was the "planned economy." We know what that meant. I spent a whole semester studying the Soviet planned economy and I can assure everybody that the subject matter of that graduate course had nothing to do with "real economics." It was a different world. Perhaps that explains Kósa's total ignorance of economics and the financial world in general.
The other problem with Kósa is that he talks too much. Once he starts going no one can stop him, especially not Hungarian television reporters who in general have problems stopping the verbal diarrhea of politicians. And, what is even worse, he doesn't think before he speaks. A lot of my friends call him a boor (in Hungarian a "bunkó"). I really wonder when will it become clear to the Fidesz leadership that this man might be very useful domestically in the sense of appealing to certain right-wing voters but that he is damaged goods when it comes to the opinion of the outside world.
Kósa opened his mouth again. On the morning show of MTV on Monday, the anchor mentioned that over the weekend S&P had talked about the real possibility that Hungary will become a "fallen angel," her bonds reaching junk status. Kósa suddenly was in his element. He said in no uncertain terms what he thought of the credit rating agencies. As Bloomberg reported, Kósa said: "Rating agencies are just whipping up the mood. They are that nice person, a classical kibitzer who in decent places gets shown the door after a while, and will be lucky if he doesn't get yelled at." He added that "we would like to cooperate with the International Monetary Fund, the credit rating agencies, the lenders, financial markets, banks, everbody. But they must understand this one thing: the era when we were told from the outside what should be done is over." And if that wasn't enough, he said that "rating agencies may say whatever they want, it's more important what Hungarian voters say."
Well, whatever we might think of credit rating agencies, they have a powerful influence over investor behavior. As for Kósa's brilliant observation about the voters versus the credit rating agencies, it's true that Fidesz's popularity at home might be boosted by Kósa's provocative words about the agencies. The credit rating agencies, however, do not rate the country based on what Hungarian voters say and how popular Fidesz is. Their ratings can, however, have a profound effect on Hungary's financial health which of course may indirectly influence voters' opinions of the current governing party.
Kósa and unfortunately Hungary cannot win the war with the credit agencies. S&P two days later answered Lajos Kósa, without mentioning his name, of course. In reaction to Viktor Orbán's reaffirmation of a budget deficit under 3% for 2011 one of the agency's analysts, Trevor Cullinan, announced that Hungary's commitment to cut the budget deficit hasn't removed the threat to its investment-grade debt rating beause "the government needs to clarify its economic policies." And Cullinan continued: "We don't take a substantial amount of comfort in the government announcements about bringing down the deficit…. We are much more interested to see the government's medium-term fiscal and economic policy." In brief, until now György Matolcsy and Viktor Orbán have just talked about deficit reduction without showing how that reduction will be achieved.
On July 23, S&P downgraded its outlook on Hungary to negative from stable, while reaffirming Hungary's BBB- rating, its lowest investment grade, after talks broke down with the IMF and the EU on a review of the country's rescue loan of 20 billion euros. If S&P were to reduce Hungary's rating one more notch, a possibility it left open at the time, that would mean junk status for first time since 1992. That would put Hungary on par with Azerbaijan and Romania, Hungary's partners in the AGRI project!
According to Bloomberg, Hungarian assets have underperformed other emerging markets "since Orbán took office in May." The forint has fallen 4.2 percent against the euro this year, making it the worst performer among 25 emerging-market currencies tracked by Bloomberg. Timothy Ash, the head of emerging-market research at the Royal Bank of Scotland Group Plc, actually said that "it makes you wonder whether it will need a rating downgrade really to concentrate politicians' minds"–I assume to make them sober up.
The analysts are still hoping that the government will come out with a tangible economic plan after the elections, but I think that they are too optimistic. The Fidesz government most likely has no coherent plan in the first place and the necessary steps that should be taken to set Hungary's house in order would mean a loss of popularity. I very much doubt that they are ready to sacrifice themselves on behalf of the fatherland they claim they love so much.