Of course, it is more than a “nationalization” of private property. It is an illegal expropriation of private property. Some commentators compared the government’s methods to those of the mafia. Others called Orbán’s Hungary a banana republic. Some people talked about a nightmarish move or a hair-raising event. And then there is the blackmail the government is employing to make sure that all participants in the pension funds agree to the transfer. How can they not when otherwise they will be deprived of 75% of the future pensions they are legally entitled to?
So let see the market reaction to this latest move. First and foremost, Hungary failed to sell the planned amount of debt at an auction today as the forint weakened and bond yields climbed higher than they were in June when two Fidesz officials and MPs raised the possibility of default. Here are two graphs showing the situation. The first is forint-euro exchange rate for the last twelve months. The second is a graph showing the results of three-month T-bill auctions.
According to analysts bond yields may rise “quite significantly” as the exit of private pension funds wil lead to a drop in demand for local debt. Let me explain what is behind this prediction. The private pension funds by law had to put a large portion of their customers’ money into government bonds. Once the funds are gone the sale of bonds at home will drop considerably. As it is, the state debt management agency (Államadósság Kezelő Központ) sold 30 billion forints ($144 million) of 12-month treasury bills, 10 billion forints less than planned, as the average yield rose to 6.05 percent from 5.94 percent at the previous auction on November 11. Bids also fell to 64.5 billion forints versus 89.3 billion forints at the last sale.
Some analysts expected an even grimmer placement and a lower bid to cover ratio than that, but it is almost certain that the situation will change for the worse as “private pension funds will gradually cease to represent a demand factor.” As it is, the yield on government long-term bonds (due in February 2015) rose to 7.642 percent, the highest since January. Thus borrowing money is getting more and more expensive. It is worth recalling that Fidesz in opposition promised exactly the opposite of what has actually happened. Fidesz politicians kept saying that yields will be at least two percentage points lower after they form a government because the Gyurcsány and Bajnai governments lost credibility. On the other hand, they have an excellent reputation in the world of finance.
The forint just this month weakened 2.1 percent which according to Bloomberg is the worst-performing currency for the period. According to Michał Dybula, an economist at BNP Paribas in Warsaw, “the pension system changes will increase long-term risks, while short-term gains such as lower public debt and deficit will prove illusory, if the economy stays weak.” Moreover, the proposed changes in pensions increase the risk of a credit rating downgrade, since Hungary’s structural fiscal position is unlikely to improve. According to Dybula, “it could actually deterioriate over the medium- and long run.”
Let’s add to Hungary’s growing problems the extra taxes on foreign, especially German businesses. Someone mentioned in the comments that because German companies are being hit hard and because Germany is a very influential player in the Union these extraordinary levies might backfire. It was almost two weeks ago that a strongly worded response came from Germany. Guido Kerkhoff, a member of the board of directors of Deutsche Telekom, condemned the Hungarian government’s anti-foreign policies. Deutsche Telekom understands the difficulties and appreciates that the government must resort to extraordinary measures, but Kerkhoff was taken aback by the way Hungary handled the whole affair. First, there were no negotiations, no early warning. The very heavy extra tax was simply announced one day. And what was entirely new: it was retroactive. Kerkhoff “has never encountered anything like that.” Well, Kerkhoff is not alone. It is illegal to enact laws retroactively.
Kerkhoff reminded people that the German company has been investing heavily in Hungary in the last fourteen years. The total investment of Deutsche Telekom is 1.2 billion euros. In the past the company’s relations with the Hungarian governments were excellent but “now I can’t quite believe what’s going on.” According to Kerkhoff the extra taxation will deprive the company of 42% of its 2010 profit. If these taxes remain in force for four years, Magyar Telekom (the Hungarian subsidiary) will pay 400 million euros, which is 16% of Magyar Telekom’s market cap value.
Deutsche Telekom expanded into Macedonia and Montenegro through Magyar Telekom, but in the future they will not be able to continue to expand in Hungary. It seems that Budapest “is breaking too many porcelain pieces” and he is not sure that the Hungarian politicians are quite aware of the consequences. He reminded his audience that the 1.2 billion euros that Deutsche Telekom has invested in the country is more than Daimler Benz is promising. Moreover, Deutsche Telekom was planning to invest more, but after the government’s levies they will most likely have to rethink their strategy. As for whether Deutsche Telekom is planning any legal action, Kerkhoff said that they are waiting for the the European Commission to ask for some explanation.
Although the British Guardian a couple of days ago asked the European Commission to pay some attention to what’s going on in the middle of Europe, it seems that the Commission at least keeps its eyes open and “worries.” Amadeu Altafaj Tardio, spokesman of Olli Rehn, the financial commissioner, announced that the commissioner would find it “worrisome if the Hungarian government were to spend the accumulated savings in the funds on current expenses as the 2011 budget seems to suggest.” It is also upsetting that the “free choice” between private and public social security funds “is not as free as it first looked.”
It is all very nice that the European Union finds all this worrisome, but we will see whether they do more than wring their hands, whether they will tell Viktor Orbán to cease and desist. Because it seems that he understands only the same kinds of threats he levels against his “subjects.”