The current financial state of Hungary

I've written about Sándor Pintér a few times already. The appointment of the chief of the national police force as the minister of interior in the first Orbán government raised quite a few eyebrows. There was and still is a lot of speculation about why Viktor Orbán insisted on Pintér's appointment against all the criticism. I wrote about Sándor Pintér's checkered career again when the news surfaced that Pintér might be the minister of interior in the new Orbán government with even greater jurisdiction than between 1998 and 2002. Indeed, Pintér was tapped once again for the job.

Pintér started his career in the police force as a truck driver while being enrolled in the rather demanding College of Engineering. It seems that he didn't have what it takes academically. Eventually at the age of 30 he finished the police academy and in 1986, when he was almost forty, he received a law degree. In outward appearance he still looks more like a truck driver than a minister or the very wealthy businessman that he is. An amusing aside: when I was trying to get some biographical information on him and put in the search tag "Pintér Sándor," Google indicated to me that someone was already looking for him with a search tag "Pintér Sándor maffia"!

In any case, the leaders of the police loved Sándor Pintér since he was one of their own. The word was that all those civilian weaklings couldn't really handle the police. They didn't speak their language. Not like Sándor Pintér. Of course, one of the problems with the police force was that Fidesz in opposition made every effort to denigrate it by accusing it of all sorts of crimes. After a few years of this relentless attack, the police leaders became totally demoralized. They didn't dare do anything. If they took a hard line that was a problem. If they were soft then they were criticized for being namby-pamby. There was no way of pleasing Fidesz. As a result Pintér inherited a police force that was pretty useless. They had better equipment than before, but when it came to acting they simply didn't do what they were supposed to.

Pintér in the very first few days after taking office made a mistake. As far as Viktor Orbán was concerned, a very big mistake. While Orbán was busily hatching a witch hunt against former prime minister Ferenc Gyurcsány, charging him with being in cohoots with the police to kill "peaceful demonstrators," Pintér stood by the Budapest chief of police, Péter Gergényi. This was at the time that Gergényi was declared to be the co-villain in the drama in the fall of 2006. Pintér had to retreat.

It seems that Pintér has gotten into trouble again. On September 24 he gave a speech at a forum of service employees in which he said a few startling things. He predicted that in the near future the police will have added responsibilities because "the purchasing power of the population will considerably decrease, people will be poorer, and there will be a situation which cannot be solved without the police force." Moreover, he added, as a result of the worsening economic situation of the country, corruption will also grow, there will be more and more economic crimes. Criminal activities on the streets will multiply. "It is obvious that there will be more armed robberies." Thus the police will need more money. However, he had to admit that there is no possibility of raising the very low salaries of policemen as of January 1, 2011.

This was a pretty grim picture that indicated that after the municipal elections an austerity program will be introduced. Because, after all, why else would the living standards drop so dramatically that petty thievery, armed robberies, and corruption cases will multiply? MSZP naturally reacted to Pintér's speech immediately. Here it is, Viktor Orbán and Fidesz lied. After the elections a lot of people will lose their jobs. By now MSZP has demanded the release of the 2011 budget figures at least three times.

Several articles and opinion pieces appeared on Pintér's speech which came to the same conclusion as MSZP. After the elections will likely come a time of severe austerity. The right-wing papers simply ignored Pintér's words. The Ministry of Interior obviously felt that some explanation is necessary. So today they came out with such a cock-eyed story that Népszabadság, instead of just summarizing the MTI report, suggested that its readers read the announcement word for word because "the ministry's statement is difficult to interpret." The ministry's explanation was that MTI simply left out an important word or two from Pintér's speech that stated that "if more debt burden turns up that was not in the budget then…." In brief, the ministry tried to suggest that those "skeletons" still may fall out of the closet. A bit too late since by now it is fairly obvious that no skeletons were found in spite of diligent efforts to discover them.

It seems that Fidesz politicians themselves were surprised at Pintér's predictions. Apparently what he had to say wasn't part of the planned government communication in spite of the fact that Viktor Orbán himself in Kötcse and since then many times tried to temper lofty expectations. But Fidesz politicians who talked to Ildikó Csuhaj, reporter of Népszabadság, expressed their opinion that to utter such words a week before the municipal elections was unfortunate.

Fidesz remains hard at work cooking up schemes to raise money for the national coffers. Rumor has it that they are extending their reach to include not only the financial services industry but energy suppliers and communications companies as well. Or at least this is what János Lázár, leader of the Fidesz parliamentary delegation, indicated this past weekend. Unfortunately, squeezing all these sectors will most likely slow economic growth. And while the government says there's no money for teachers, doctors, or policemen, Viktor Orbán promises a sport stadium to Debrecen and a new bridge for Szeged. That is if the good people of Szeged vote for the Fidesz candidate for mayor. Just today I read that the government is preparing to invest in the Hungarian railways. Elsewhere one can read about a new bridge across the Danube between Komárom and Komárno.

All in all, it is difficult to to know what's going on exactly. No coherent picture is emerging about the economic plans of the government. A few days ago there was a report that Matolcsy's undersecretary in charge of taxation announced that the government had postponed the introduction of a flat tax until 2013. This morning the inimitable György Matolcsy said that as of January 1, 2011, there will be a flat tax. Meanwhile we know that this year a great deal less money was received by the treasury than the year before and by now 125% of the budget allocations for 2010 have been spent.

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Member

Wait a minute .. I like this guy. Let’s forget that he’s a FIDESZ politician with a “checkered” past. Isn’t he saying that we should restore law and order with a strong police force and face the economic realities. We should keep an eye on the fellow.

Pásztor Szilárd
Guest

Maybe, if Bruxelles agrees on the different (and correct) accounting of pension incomes, the government can have a larger economic area to maneuver. This can mean the tax cut becomes possible, which I sincerely hope they manage to do.
Hungary needs a significant tax cut, as soon as possible.

Odins lost eye
Guest

Pastor You say * “Maybe, if Bruxelles agrees on the different (and correct) accounting of pension incomes.” *
Would you care to explain this? Or is this weird figment of someone’s over heated brain.

Mark
Guest
“This was a pretty grim picture that indicated that after the municipal elections an austerity program will be introduced. Because, after all, why else would the living standards drop so dramatically that petty thievery, armed robberies, and corruption cases will multiply?” Actually let’s get the bad news out of the way first, shall we? Austerity or no austerity, average living standards are going to fall. Hungary has a competitiveness problem – what this means is that its living standards are too high for its level of productivity, and if Hungary is to grow either the productivity level must be increased, or living standards must fall to price the goods the country can produce back into its markets. Unfortunately, productivity increases will only come through significant investment (most of which, given the low savings ratio and high indebtedness, has to come from outside the country). For this investment to occurr the competitiveness problem will have to be solved, so living standards one or the other have to fall. The real question and the area of choice is how this happens – (1) internal devaluation, which means tax increases and public expenditure cuts, that given the extent of the problem will have… Read more »
Gábor
Guest
Szilárd, the government won’t have a larger room for manoeuvre with a different accounting, as the main issue is the ability of the country to service its debt. As long as you can’t pay for your creditors from the money flowing into the private pensions (and a different accounting wouldn’t enable the government to do it) they would need to issue new bonds or cut expenses. The keyword is primary deficit, the deficit without interest payments of the sovereign debt. As long as it is positive you are paying down your debt, as long as it is zero, you are rolling over your debt and as long as it is negative you are going to be even more indebted. (A fourth option, inflating debt is not given for Hungary because of the high ratio of foreign denominated sovereign debt.) Therefore the govermnet can’t use this accountability trick to finance tax cuts, as it is only imaginary money and without compensation on the spending side it would lead to growing debt to GDP ratio. Something easily detected by markets. A possible new accounting for the private pensions could probably save Hungary from the penalty for breaching Maastricht rules (although I see… Read more »
Alias3T
Guest

@Odin: Hungary introduced a pension reform in 199?5 which means the bulk of employees’ pension contributions are invested in private pension funds which are then invested on the market, ideally for maximum return.
Most European countries have done this. There are some exceptions, though, including Spain and Portugal, as I recall. In countries which still only have a state pension, employees’ pension contributions go straight into the state budget, and so are effectively a source of tax revenue.
Several countries that have introduced a private pension reform, including Hungary, argue that this is unfair: Spain’s budget gets a free bonus from pension contributions, while Hungary doesn’t.
The argument has some merit, though not much. Over the long run, it should make no difference to the budget: the Hungarian state receives less money in pension contributions now, but has fewer liabilities in terms of pension obligations in the future. Spain gets the money now, but has the liabilities to pay when those contributors retire.
If, however, you were a government whose sole concern was somehow surviving the next two years without going bankrupt, while cutting taxes to gain a political dividend, then of course you’d be upset about Spain’s apparent free ride too.
– Legalja

Mark
Guest

Odin: “Would you care to explain this? Or is this weird figment of someone’s over heated brain.”
What he means (though I’m sure he will correct me if I’m wrong), is that Brussels would allow the government to count the money paid and sitting in private pension funds as part of the state budget, thus easing – on paper at least – the burden of paying pensions.
Unfortunately under EU law these moneys are the private savings of those who pay in, and were the government to nationalize them (what that would mean) they would legally have to compensate those paying in (in other words they would have a right to their money back). This would negate the benefit. If they didn’t pay the money back, they’d effectively be guilty of theft. Which is why Brussels is not going endorse this plan.

nwo
Guest
Surprisingly, there is truth in most of you are saying. (1) Hungary does need tax cuts (2) The private sector does not create sufficient jobs. (3) Changes in pension accounting may help Hungary avoid excess deficit procedure in EU, but will not sole the debt burden. (4)HOWEVER, without a major debt restructuring, Hungary will continue to require a substantial internal devaluation (just like Greece and Ireland among others). Yet, as none of us really seem to believe Hungary can really grow its way out of its debt burden, what it really needs is to reschedule/restructure its foreign debt (massive haircut) and devalue the HUF to effectively inflate its way out of its domestic debt. This will be short term very painful (maybe bankrupt the banking system), but could if followed up with sensible growth policies and prudent fiscal policy provide a foundation for longer term growth. With the debt burden overhanging the country, there is no way to invest in education, health care, r&d etc. Without such investment, there is no way to have sustainable long term growth. Without these long term investments,all productivity gains will be come from a weaker forint and lower wage costs. Hungarians have lived beyond… Read more »
Paul Haynes
Guest

If things really turn out as most on here seem to think, and Hungary has a pretty rough time over the next 4 years, will Fidesz lose enough support to make the next elections uncertain? Or will the Orbán worship and the amount of emotional capital people have invested in his ‘analysis’ and promises over the last few years mean that somehow Fidesz will escape the blame?
And, if Fidesz does lose significant support, will there be any sort of coherent opposition able to take over in 4 years time?

Headless
Guest

” Without such investment, there is no way to have sustainable long term growth”.
This is where it’s at. And let’s also keep in mind that Hungarians are not breeding, which will create huge problems of imbalance in the future. But I guess that short-termism rules the day.

Paul Haynes
Guest

To be fair, Headless, the last is not a problem unique to Hungary, populations are declining all over Europe. In our consumerist society, kids just affect your standard of living too much to have more than two.
The only exception to this trend in Western Europe (as far as I’m aware) is Britain, and the only reason our population has increased recently is the large number of Poles (and other) coming over here to work and having kids whilst they’re here (they have also rescued the RC church from declining congregations!).
It makes you wonder if consumerism is a viable form of society (in Darwinian terms), if, in order to function, it forces the population (= number of consumers) to decrease.

Pásztor Szilárd
Guest
@Gábor: by changing pension accounting, yes it is imaginary money you gain but it shows in the income side of the budget, meaning lower interest rates in financing government debt. That alone saves money. As for “crying” for tax cuts, you demonstrated absolutely nothing. You refused to take into account that many other aspects of the taxing system are a work in progress, and did not hesitate to calculate with the 16% flat rate only, without any added trickery to the system, then you got the result you so desperately wanted: that those with low incomes will suffer. That Orbán said the new tax system will ensure that no salary will be worth less than before, remains only a minor distracting factor in your “calculation”. I don’t call that demonstration, I call that wishful thinking (at a low level, however). @Odins lost eye: we’d all be better off if you at least tried to get information on specific issues before unleashing your “sophisticated” writing style. The change in pension accounting, as described my many commenters here, is a joint endeavour of 9 countries, including Hungary. @Paul: don’t root for Fidesz losing power at the next elections. The last 16 years… Read more »
Pásztor Szilárd
Guest

@nwo: good point. I had already talked about the same thing before. Yes Hungary is in a very difficult situation concerning government debt. And let’s not forget who caused this. Orbán handed over power in 2002 with a debt of 56% (which they managed to steadily decrease for years) and now we are well over 80%. Big “thanks” to the “socialists” who managed to give this nice present to us, now it’s Fidesz again who have to clean up the mess.

Eva S. Balogh
Guest

Szilard: “Big “thanks” to the “socialists” who managed to give this nice present to us, now it’s Fidesz again who have to clean up the mess.”
Yes, indeed, this was a nice present to the Hungarian people who lived beyond their means.
As for the difficult situation. Yes, it is difficult but it more difficult now than it was in April.

Paul Haynes
Guest
Mark (and others) – getting back to my question about the true value of the forint. I’ve never really understood why a particular currency has a particular exchange rate, or who or what controls this. Would it be possible to post a simple explanation of this? It would be much appreciated. I understand that currency trading must play its part – presumably the rates traders are prepared to buy and sell currencies at to some extent dictate the exchange rate. But surely this can’t be the whole story? I would expect chaotic fluctuations in the value of the currecy if this was all it depended on. So, presumably, the government and/or the state bank have some say as well – but how? Does the government just set a rate and that’s it (like the old cold war days when the USSR declared parity between the ruble and the dollar, whatever the reality). Or does the government/state bank have to actually ‘artificially’ boost or lower the exchange rate by buying currency, releasing reserves, printing money, etc – and, if so, how does this work? To take our specific example, everybody seems to agree that the forint is overvalued, but why does… Read more »
Paul Haynes
Guest
Eva – Obviously the Hungarians themselves must take a large share of the blame for living beyond their means, and the consequences of doing that. But I think using this argument to counter Szilárd’s critisism of the previous government is a bit glib. After all, what were the government doing while this was going on – encouraging it, trying to stop it (how?), or just turning a blind eye, hoping everything would sort itself out? To blame the people, is to effectively say that the government has no role in what happens in a country. And, if that is the case, one needs to ask why have the government at all? I am also fairly sure that, had this happened during Fidesz’s watch, you would be slightly more inclined to blame them and not the people. As for the people themselves, I can’t speak for the Hungarians, but from what I’ve seen and heard in the UK, people have learnt absolutely nothing from this crisis. They scapegoat the banks, but they also do nothing to change their own ways. Most people I know are just hoping to ride out the situation, waiting for the day when things pick up again,… Read more »
Eva S. Balogh
Guest
Paul: “Eva – Obviously the Hungarians themselves must take a large share of the blame for living beyond their means, and the consequences of doing that. But I think using this argument to counter Szilárd’s critisism of the previous government is a bit glib.” Yes, somewhat it is but one gets a bit exasperated when some people think that the debt was accumulated because politicians put all that money into their own pockets. Both sides of the political spectrum have been responsible for that state of the affairs in the last twenty years. The Kádár regime as well, by the way. Kádár et al bought the support of the people by keeping up a certain level of well being when the country’s economic situation didn’t warrant it. After 1990, the two sides were trying to outdo each other in promising all sorts of goodies in order to win the elections. This is how one got to 2006 when at least Gyurcsány said that this must stop. Too bad that he didn’t tell the Balatonőszöd speech in public in a more measured and more precise language. From 2006 the governments faced the truth and you can see what the result was.… Read more »
Pásztor Szilárd
Guest

@Eva: no. The problem is not that Hungarians lived beyond their means, the problem is that most of this money, which is now government debt, was either stolen by the government or thrown out of the window because of the incapable financial leadership of the “socialists”.

Pásztor Szilárd
Guest

@Paul: the allegation that Hungarians lived beyond their means is a well-known “socialist” excuse for their own incapability. This was already used by comrade Berecz many decades ago who said “nem a zsömle kicsi, a pofátok nagy” (“it’s not the bread roll that is small, it’s your jaw too big”). Same as with “the state is a bad owner!” nowadays, it is only a covering story they use to blind you from the truth.
During Orbán’s governance between 1998-2002 Hungarians didn’t live on any lower standard, yet the government debt, along with inflation, managed to decrease, and the economy was growing. It can be done, it has been proven. By suppressing infamous socialist corruption, billions of euros can be spared alone. With clever financial policies, even more.

Pásztor Szilárd
Guest
@Paul: don’t be mislead be Eva’s words. Gyurcsány didn’t say “it finally hast to stop” [living beyond our means], he said “we [the government and the soc. party] were lying and now we must stop doing it, otherwise the country will collapse”. He also spoke of “hundreds of tricks, of which you don’t need to know” where “you” meant the other party members, and the tricks meant for example lying to the European Union about Hungary’s financial situation. About everything he spoke of in that infamous speech was about themselves, not of the country. It was all about how with his (Gyurcsány’s) leadership they (the party) managed to bring governing [winning the elections] “back from the shit”, as he has put it (from a lost popularity, using lies). It would be worth to make an English translation to allow you see with your own eyes how the left-wing media twisted this obvious speech into some sort of a “truth” speech when, in fact, it was nothing else than an inner “confession”, not at all meant for the general public, that they “lied morning, day and night” and “almost died in pretending to be governing for a year and a half”… Read more »
Mark
Guest
Paul Haynes: “getting back to my question about the true value of the forint. I’ve never really understood why a particular currency has a particular exchange rate, or who or what controls this. Would it be possible to post a simple explanation of this?” The short answer is there are explanations but none of them are simple and while there are materials I could refer people to theories of exchange rate determination they are pretty technical. Basically an exchange rate is a reflection of the relationship between what happens within a currency zone and the rest of the world economy around it. This is a bit pedestrian, but it really gets very technical. If a state trades with other states it cannot unilaterally set an exchange rate, even if, as in the case of the USSR the state has a legal monopoly of foreign trade. In practice, even in the USSR there was a rouble traded at an official tourist rate, a black market rates, and a range of official commercial rates. There are number of policy tools a state can use to influence the exchange including (say as in the case of the UK before 1979 or the Hungary… Read more »
Mark
Guest

NWO: “Yet, as none of us really seem to believe Hungary can really grow its way out of its debt burden, what it really needs is to reschedule/restructure its foreign debt (massive haircut) and devalue the HUF to effectively inflate its way out of its domestic debt. This will be short term very painful (maybe bankrupt the banking system), but could if followed up with sensible growth policies and prudent fiscal policy provide a foundation for longer term growth.”
This is precisely my position – in fact I think this outcome is unavoidable. And it will be very painful – so painful that I suspect FIDESZ might wish the 2010 elections were ones they shouldn’t really have wanted to win! I hope that both the “left” and “right” sides recognize that this requires political consensus and some form to government of national unity to carry it through to contain extremism. After all it would be a shame if irrelevant conflicts which have little to do with Hungary’s future end up making the country ungovernable.

Pásztor Szilárd
Guest

@Mark: would this mean that if the Hungarian Central Bank (MNB) were to set the base interest rate from 5.25% to, let’s say for example, 2%, the Forint would significantly weaken shortly after?

Pásztor Szilárd
Guest

Well, here is one important news item about bank tax:
http://www.portfolio.hu/en/cikkek.tdp?k=2&i=20916
“Hungarian bank tax may be copied in CEE, Fitch warns”
This is why Orbán’s initiative caused so much upheaval: they were afraid the example would be sticky. And it seems it indeed was.
I hope some of you even realize with whom are/were you actually siding… (Those who do it on purpose won’t “realize” of course.)

John T
Guest

Szilárd – “Hungarian bank tax may be copied in CEE, Fitch warns”.
I don’t have a problem with the banks facing a levy, bearing in mind the trouble many have caused and the pain people are suffering as a consequence. But as I’ve said before, the banks will likely get the money back through higher transaction costs. Additionally, the banks here in the UK are looking to repair their balance sheets and as a consequence are making it much harder for businesses to borrow money. This doesn’t help the economy to recover / grow. So if the banks do the same in CEE, it is going to be problematic. So this issue has to be thought through.
And one further point – the views expressed on this board are by and large fairly mainstream as far as I can see and typical of the Western European outlook. I find your assessment of our views somewhat bizarre to be honest.

Pásztor Szilárd
Guest

@John T: the views expressed here, when speaking about Hungarian domestic politics, are in extreme minority.
About financial views, you are right, they are mainstream – which doesn’t mean they’re right, as Orbán and his government is on the way to prove it. I hope they succeed.

Paul Haynes
Guest

Mark – thanks again for your reply.
This link between an ‘artificially’ high bank rate and exchange rate is going to give OV problems then. If he seriously wants to encourage people to take out forint mortgages, he is going to have to bring the base rate right down. And, if he does that, the forint follows it down and inflation goes up.
I wish I shared PS’s certainty that OV a) knows what he is doing, and b) will get it right.

Pásztor Szilárd
Guest

@Paul: Orbán can’t bring the base rate down because the base rate is controlled by the Central Bank led by András Simor, who is by the way on enemy terms with Orbán.

Alias3T
Guest

@Szilard: Trust me, Orban would not be every happy if Simor cut the rate substantially. Think of all the loans! Orban would be out of office within a week.

Mark
Guest

Pásztor Szilárd: “would this mean that if the Hungarian Central Bank (MNB) were to set the base interest rate from 5.25% to, let’s say for example, 2%, the Forint would significantly weaken shortly after?”
I’d be astonished if it didn’t.

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