Reverberations: Reactions to Moody’s downgrade and the “nationalilzation” of private pension funds

I assume that eventually the avalanche of media reactions abroad and in Hungary concerning the Moody's downgrade will come to an end. However, the possible effects on the Hungarian economy might be of longer duration. Let me start with an article in the business section of The New York Times with the telling title "Playing With Fire." I will just pick a few choice sentences that will give a sense of the article's tone: "Investors might wonder what Hungary is up to." Or, after mentioning the high debt and the raid of private pension funds, worth some 11.5% of GDP, it continues that "tricks like these will make Hungarians and international investors anxious. That won't help growth and might cause a crisis…. The risks for the economy, and for creditors, are great."

However, government officials and politicians don't seem to be worried at all, or if they are they are good at hiding their misgivings. Lajos Kósa, whose knowledge of the world is close to zero, lightheartedly announced this morning that neither Moody's nor Standard & Poors is governing Hungary. Moreover, according to Kósa, the analysts sitting at their desks in London have an easy time of it. They don't care whether the poor Hungarian employee receives his twelfth-month salary. These people are not even interested in whether Hungary exists. I don't believe it is necessary to dwell on the primitive populism underlying Kósa's very unfair words.

However, Moody's didn't take all this to heart and today downgraded eight Hungarian banks as well. They are OTP, OTP Mortgage, K&H Bank, MKB Bank, Erste Bank Hungary, FHB Mortgage Bank, MFB, and Budapest Bank. And while Moody's was at it, they decided to downgrade Budapest's bonds as well. The reason for the downgrade of the Hungarian capital's bonds is that the Hungarian government guarantees 60% of its debts.

Among the reports on Moody's downgrade and its possible effects on the Hungarian economy there was only one that was upbeat. The conservative Frankfurter Allgemeine Zeitung considers the fall of the forint relatively slight; credit default swaps (CDS) have actually dropped since the end of November. The article claimed that Moody's overreacted.

Viktor Orbán, who is in Stockholm, was optimistic. The positive results stemming from his government's actions will prove that he and his government were right. As fas as the Moody's downgrade is concerned, Orbán knew three months ago that this would happen. After all, "the unusual methods" the Hungarian government has been employing might not be to the liking of the market. Nobody likes "crisis taxes, or the bank tax." He doesn't like them either, but the analysts will eventually understand that the Hungarian government had to resort to them in order to decrease the budget deficit and the national debt. That's why he is sure that Hungary will soon be "upgraded." Of course, he didn't mention that the hole in the budget is his own government's doing. And he certainly didn't mention the nationalization of the pension funds which created a stir all over the world.

Here is one opinion from eFinancialNews: "The most blatant smash-and-grab raid occurred in Hungary, where government policy appears to herald the destruction of the country's 2.7 trillion forint ($12.8bn) private pension system." Similar criticism came from Leszek Balcerowicz, the author of the Polish shock therapy that put Poland on the road to economic growth. Balcerowciz was twice minister of finance and after 2000 chairman of the Polish National Bank. Balcerowicz gave an interview to Gazeta Wyborcza in which he expressed his hope that "no Viktor Orbán under a different name will ever show up in Poland."

It seems to me that Orbán himself is beginning to realize that grabbing over 3 million people's savings might backfire. Although a week ago György Matolcsy announced that the returns on the investments in the private funds will be taxed, today Orbán, together with his closest associates, Lajos Kósa and János Lázár, turned in a proposal that would make the returns earned tax free. I assume they realize that this whole issue is a hot potato and that the ruthless way that money was grabbed might mean losing substantial political support. As it is, Orbán himself has already lost some of his popularity (from 68% to 54%) and about 200,000 Fidesz supporters have evaporated.

And, by the way, talk about Matolcsy's departure has surfaced again. Perhaps you remember that sometime at the beginning of October Magyar Nemzet of all places came up with some harsh criticism of the economic minister and predicted his departure from his post. At that point Viktor Orbán defended him and called Matolcsy "his right hand." Now, a couple of months later, rumors are flying again. Observers suspect that his successor will be Tamás Fellegi, who although he has no financial or economic background is handling the ministry with the odd name Ministry of National Development. One thing is sure, Fellegi is getting more and more important assignments. He was the one who laid the groundwork for the Putin-Orbán meeting and now he is doing the same in China. Let's just hope that Fellegi will be more successful in Beijing than he was in Moscow.

Most likely it will not help Matolcsy's case that The Financial Times ranked him next to last on a list of finance ministers of the European Union. The last is the Irish finance minister; Matolcsy ties for the penultimate place with Spanish finance minister Elena Salgado. I'm not surprised. Matolcsy lacks a sense of reality, and I think he makes himself ridiculous in the eyes of the international financial community. I wouldn't be at all surprised if there were considerable pressure on Orbán from within the party to get rid of "his right hand."

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Paul
Guest

“Similar criticism came from Leszek Balcerowicz, the author of the Polish shock therapy that put Poland on the road to economic growth. Balcerowciz was twice minister of finance and after 2000 chairman of the Polish National Bank. Balcerowicz gave an interview to Gazeta Wyborcza in which he expressed his hope that “no Viktor Orbán under a different name will ever show up in Poland.””
Criticism doesn’t get much more damning than that!

m
Guest

Bashing O.V. is less effective, than making viable proposals, that would stand against the reality of Hungary. The EU evidently needs new rules like against reckless nationalisation. Not just as a lex Hungary, also useful for Baden Würtenberg.

Bálint
Guest
Um Eva, I personally know some of those analysts in London – I have some awful news for you: Kósa was right – they actually don’t give a damn about Hungary (although they certainly appreciate the favorable price-to-beauty ratio available in certain sectors of the Hungarian hospitality industry). Actually the only thing that really gets them emotionally involved is the fact they regularly come across people who seem to be making more money than they are. Don’t get me wrong here. I respect what you do, and since I’ve stumbled on your site a month or so ago I’ve found you an indispensable guide in English to the insanity of what’s going on here in Hungary, but I do find myself getting the impression that if Victor Orban said that water is wet you’d characterize it as Fidesz propaganda. We’re facing a world-wide economic situation at the moment where the super-rich are sucking up an increasing share of the wealth at an accelerating rate. We have increasing poverty here in Hungary for the same reason they have increasing poverty in the United States, not because people are lazy and stupid, but because wealth is getting concentrated into the hands of… Read more »
Joe Simon
Guest

These are turbulent times indeed, and not only in Hungary. A well known investor on CNN just last night predicted catastrophe for the US: 13 trillion national debt, Americans are 16th on a world list of education achievement, etc. Even South Korea surpasses the US in having higher educational standards. US industry is sinking to the level of supplying raw materials to the world, cardboard boxes to China, etc. And now we have Avon Lady Sarah Palin planning to run for the presidency. Well now there would be lot of meat for the Spectrum get its teeth into.

Paul
Guest

‘Joe’, has it still not sunk in that: a) this is a blog about Hungary (the clue is in the title), and b) how other countries are doing (good or bad) in no way affects ctiticism (or indeed, praise) of OV and Fidesz.
You’re wasting your time with these ‘what about the USA’ posts. Why not post something about the actual issues? For instance, we all know the criticisms of Fidesz, but you, as a confirmed Fidesz supporter, could give us the other view.
I assume there is some design, possibly even some logical justification, behind Fidesz’s policies, so why not, as an insider, explain these to us?

Paul
Guest

Good post, Bálint, one of the few post on here since Mark died that’s made me really think about things. I felt uncomfortable reading it, which is always a good sign!

GabeGab
Guest

Bálint is right: living in the US I could feel the same uneasiness to criticize the Hungarian government from a progressive (and not neo-) liberal standpoint. Unfortunately these times in many ways resemble to the thirties of the last century. That is: there are no easy answers, but it is increasingly clear that now in Europe the right-wing populism that Orbán represents poses an even graver and imminent danger than the possible further “destruction” caused by the “neo-liberalism” of today’s IMF.
We may follow Krugman that in the foreseeable future the euro may not be a viable option for any weaker economy in Europe, but otherwise the only option we have is to work with social-democrats, liberals and reasonable conservatives of Europe to fight the nationalist-populist right let it be in Italy, Poland, France or Hungary.

John G
Guest

@Balint: “but I do find myself getting the impression that if Victor Orban said that water is wet you’d characterize it as Fidesz propaganda.” Yes there is a touch of that here, but only because Orban and the Fidesz are in government with a 2/3 majority which calculatedly disregards anyone else’ ideas. This, we know best, paternalistic attitude to the country makes anything they say suspect. It used to be said what’s good for General Motors is good for the USA. Look where that got them.
But let’s get back to Orban and the wet water. Would he had said that. I’d unhesitatingly agree with your take on this blog. Except what Orban is saying is that the water in the EMPTY bathtub is wet. That IS propaganda.
From your comment and name I presume you read Hungarian. May I recommend you wander over to Mandiner from time to time and read the comment section to any blogger’s entry on that site. Just by way of comparison.

Sandor
Guest

Hi Balint, and congratulations for your excellent posting: you are eloquent and a tiny bit wrong at the same time. Pleasure to read your text.
Where I am in disagreement with you is this passage:
“- they actually don’t give a damn about Hungary (although they certainly appreciate the favorable price-to-beauty ratio available in certain sectors of the Hungarian hospitality industry).”
Well, it is exactly the kind of “value expert” who’s opinion should be considered, as opposed to the “passionate” crooks, staggering under the weight of their own importance and nationalism, to evaluate what’s happening. If I have to choose, I would prefer the cool, dispassionate, calculating bastard in London, who cares only about the money and value for the buck, because I can rest assured that he is not nursing some ulteriour agenda while coming to conclusions.
And if you say, he is not a “nice guy,” I may agree with you on that, but he could hardly be any less nice than the perpetrators of the stupid pseudo-policies he is assessing as junk.

GDF
Guest

Paul:”‘Joe’, has it still not sunk in that: a) this is a blog about Hungary (the clue is in the title), and b) how other countries are doing (good or bad) in no way affects ctiticism (or indeed, praise) of OV and Fidesz.
You’re wasting your time with these ‘what about the USA’ posts. Why not post something about the actual issues? For instance, we all know the criticisms of Fidesz, but you, as a confirmed Fidesz supporter, could give us the other view.”
Joe’s posts remind me the old Soviet reaction to any criticism: “But in the US they beat the Negroes” (actually I am not sure of the actual Russian wording, the Hungarian translation was “verik a negereket”).
I think the reason Joe does not post logical defenses of the FIDESZ’s or Orban’s positions is that such logical defense does not exist.

Rigó Jancsi
Guest

So maybe Orbán’s right will not be a Szent Jobb in the end… 🙂

Eva S. Balogh
Guest

Balint: “It’s possible to feel dismayed at the weird mixture of amateurishness, opportunism, and wishful thinking that is the Fidesz economic program without endorsing self-serving neo-liberal economic orthodoxies that have been turning the world economy into a wealth extraction machine working for the benefit of the people on top.”
I don’t pass judgment. I don’t have a high opinion of these analysts but unfortunately they matter. Whether neoliberal orthodoxy is right or wrong… again I can’t judge but unless some miracle happens Matolcsy’s unorthodox methods will simply not work.
And by the way, I also dispair over the gap between haves and have-nots but the fact is that where it is really bad it is in this country and not in Hungary. Moreover, I am somewhat dismayed by a government that takes away the money of foreigners while makes sure that their rich Hungarian friends will just do fine. The whole thing stinks.

Eva S. Balogh
Guest

GabeGab: “but otherwise the only option we have is to work with social-democrats, liberals and reasonable conservatives of Europe to fight the nationalist-populist right let it be in Italy, Poland, France or Hungary.”
I feel exactly the same.

Odin's Lost Eye
Guest
In your piece professor you remark about Hungary ** “…. The risks for the economy, and for creditors, are great.” You also report Lajos Kósa remarks about market analysts at ‘Moody’s and Standard & Poors’ being as you again report ** “They don’t care whether the poor Hungarian employee receives his twelfth-month salary”. Both Moody’s and Standard & Poors’ are businesses. Amongst other things they sell information. If you are doing this you had better be correct. I do not know the details of their systems but the main analysts at both companies certainly would not be interested ‘ladies of negotiable virtue’ or even gentlemen of the same ilk. These analysts work on the data available, to set rules and come up with pointers which are then ‘translated’ by human beings who add in the political situation, personalities, etc. Their function is to warn those who invest money in Hungary of the risks. Oh and by the way those who invest are, in the main, not ‘Bloated Plutocrats’ but the ‘Institutions’. These are the pension funds, unit trusts, and others who look after the small people’s savings. The various downgrading are due entirely to the actions of the Hungarian Government.… Read more »
Bálint
Guest

Paul –
The announcement of Mark’s death was the first I’d heard of him and I spent some time going through the archives reading his comments. You’re much too kind. That sort of intellect, focus, and natural courtesy is very rare in the world, still rarer in online forums.

Joe Simon
Guest

‘GDF’ – I am no PR man for the FIDESZ, far from it. Gyurcsány has discredited himself. Also, there is his odious connection to the Apró family. So we are left with Orbán. In the past he has proved himself to be a committed democrat. With the constitution, for eample, he is simply following the European model. While many consider the US Constitution to be deliberately ineffective by design, in a Parliamentary system the Parliament is supreme. In England the majority party in the House of Commons holds all the power. The judiciary has no power to review. In France the Constitutional Council has little power. In Canada the Supreme Court is used as an advisory court issuing opinions on the constitutionality of laws. And with the European Court of Justice excercising judicial review and the European Court of Human Rights, Hungarian democracy is in no danger to be subverted. Orbán wants a strong and effective government. People are disillusioned and apathetic. And very impatient. He is trying to breathe some purpose and vitality in a tepid nation.

Bálint
Guest
My major point in my initial posting was not that we should never listen to people who are not ethically irreproachable, but that… Let me put it this way. It’s an undeniable fact that a downgrading from the rating agencies makes it more expensive for Hungary to borrow funds on capital markets. This is obviously a bad thing. It does not follow from this that the rating agencies know what they’re doing, that they are immune from groupthink, or that they are not advocating policies that lead to the further concentration of wealth. (Triple A ratings on CDO’s based on subprime loans anyone?) It also does not follow from this that Orbans’s economic plan is not a shoddy patchwork of wishful thinking and desperation. As to which is worse neoliberal orthodoxies or right-wing populism – it reminds me a bit about grade school discussions about whether you’d rather die in a car crash or a fire. Most people – not just in Hungary – understand very little about economics, but they do understand when they regularly run low on food at the end of the month that financial orthodoxies of the moment are not everything they’ve been cooked up to… Read more »
Eva S. Balogh
Guest

Balint: “everyone – including financial analysts – tries to please the people who pay their salaries, and simple, but shockingly true – the people paying the salaries of the financial analysts have an inherent bias”
Sure, but it doesn’t matter as long as markets can be influenced by them. They are often wrong and they are copycats. But all that doesn’t matter as long as if one day they decide to downgrade Hungarian bonds to junk status which would mean that certain investments would be barred from the Hungarian market. We could stand on our heads, Orbán and Matolcsy could scream and holler, yet the situation wouldn’t get any better.

Bálint
Guest
In the short term telling the ratings agencies to jump in the lake is a problem; in the long run, there may be worse things. This is assuming of course that the government has a coherent alternative strategy for economic recovery – a situation which – sadly enough, does not seem to be the case here in Hungary. The Argentinian recovery after their 1999 – 2002 crisis was achieved by a partial default on debt in defiance of orthodox prescriptions. More recently we’ve seen Iceland scandalize everyone by not bailing out their banks with public money and making an economic recovery, while rates on Ireland and Spain seem to edge higher with every new cut announced in the budget. Ireland is an interesting case in particular: another country raiding the pension system but this time with the blessing of the grown-ups because the funds are being stolen – excuse me – appropriated – to pay the banks. I understand your point of course. Mine is that just because a solution is labeled radical or heterodox does not make it untenable and certainly shouldn’t make it unthinkable. There are two schools of thought on the current world economic crisis – one… Read more »
Alexander Peterson
Guest

Isn’t it interesting that countries that take the unorthodox route, tend to do ok – or at least better, arguably, than they might have done?
Malaysia (post-1997), Argentina (post-2002), Iceland (post-2008).
It’s a pattern, but may we call it a trend?

Eva S. Balogh
Guest

Balint: “In the short term telling the ratings agencies to jump in the lake is a problem; in the long run, there may be worse things.”
That brings up a comment written by a reader of Hirszerzo:
Miért nem minősitjük mi a hitelminősitőket, elvégre nem ők találták fel a spanyolviaszt, őket is csak jól megfizetik hogy mondják a tutit
For those of you who don’t know Hungarian. The commenter asks why don’t we rate the credit rating services. After all they not not the fountains of knowledge.
Sure, they are not, but this is reality.

Alexander Peterson
Guest

E.S.B 12.10pm “but this is reality.”
But it is a created reality.
Merkel made this point in May of this year:
“On the same day that her cabinet approved a €22.4 billion loan for Greece, Ms Merkel said there was a clear case to be made for a European ratings agency. A European agency could provide ‘an understanding of basic economic mechanisms different from the existing agencies, more oriented towards …[sustainability] of the economy and less on the short term,’ she said. ‘More competition in this area can not hurt.'” http://euobserver.com/9/30001

QWERTZ
Guest

“another country raiding the pension system but this time with the blessing of the grown-ups because the funds are being stolen – excuse me – appropriated – to pay the banks.”
This is a misunderstanding Orbán will love. Ireland is raiding the national pension reserve. Hungary is raiding private accounts of its citizens.

Eva S. Balogh
Guest

Alexander Peterson: “Ms Merkel said there was a clear case to be made for a European ratings agency.”
And you think that a European ratings agency would be so much better than the existing ones? Why do you think so?

GDF
Guest

Ba’lint: “There are two schools of thought on the current world economic crisis – one is that it was caused by black people buying houses they couldn’t afford in the US….”
I think this is somewhat oversimplifying it. I doubt that anyone can deny the fact that extremely relaxed credit terms enabled people (blacks, whites and others, but people whose credit normally would not entitle them for a loan to buy real estate) to obtain credit they did not deserve. This was started by the government trying to enable everyone to achieve the “American dream” of owning a house. The result was that unscrupulous borrowers and lenders flooded the market with unjustifiable loans backed (or justified) by the government, unscrupulous financiers repackaged and sold these loans to unsuspecting investors and unscrupulous insurers insured some of these investments. When the loans defaulted, the whole house of cards collapsed.

Mutt Damon
Guest

@GDF I think Ba’lint was joking about the blacks and the Greeks. He is trying to hypnotize the wealth condensation idea into out minds as the ultimate cause of the current recession. I think soon we’ll hear why the centralization of capital stops circulating the money. I remember those cartoons from my high school history books where old men in black cylinder hats were sitting on big back sacks with dollar sign on them … 🙂

frank
Guest

GDF:….”unscrupulous financiers repackaged and sold these loans to unsuspecting investors and unscrupulous insurers insured some of these investments”…
And isn’t it funny that the same rating agencies did not downgrade those loans. What does that tell you?

Bálint
Guest
QWERTZ: Yes. A good point. I should hasten to explain that I wasn’t bringing up the Irish business as a way of justifying what Orban is doing in Hungary, but as a way of questioning the infallibility of received economic opinion; it is possible, at one and the same time to have a distaste for the banks stealing the people’s money and the state stealing the people’s money. And Eva, I see the chance of getting you to budge on this is pretty slim – really there are so many sticks to beat Orban with – can’t you give up just one? Especially when it might be used to beat us later? It occurs to me that an analogy might be made with “teaching to the test” – a concept you’re surely familiar with from the US. In the same way that training elementary school students to pass a battery of standardized tests to the exclusion of everything else seems to be providing children with an inadequate education even when testing targets are met, making the ratings agencies happy is not the be all and end all of a healthy economy – in some cases focusing exclusively on making them… Read more »
Bálint
Guest
QWERTZ: Yes. A good point. I should hasten to explain that I wasn’t bringing up the Irish business as a way of justifying what Orban is doing in Hungary, but as a way of questioning the infallibility of received economic opinion; it is possible, at one and the same time to have a distaste for the banks stealing the people’s money and the state stealing the people’s money. And Eva, I see the chance of getting you to budge on this is pretty slim – really there are so many sticks to beat Orban with – can’t you give up just one? Especially when it might be used to beat us later? It occurs to me that an analogy might be made with “teaching to the test” – a concept you’re surely familiar with from the US. In the same way that training elementary school students to pass a battery of standardized tests to the exclusion of everything else seems to be providing children with an inadequate education even when testing targets are met, making the ratings agencies happy is not the be all and end all of a healthy economy – in some cases focusing exclusively on making them… Read more »
Bálint
Guest

To all – apologies for the double posting.
GDF – that’s a wonderful compressed summary. If you can work inherent imbalances of the service economy you’ll deserve some sort of award.
I guess you realized that I was not endorsing the blacks-with-houses-with-too-many-bathrooms view of what went wrong in 2008. That view is nonetheless the standard explanation for the crisis offered by serious American politicians, serious at least in the sense that they’ve been elected to high office. And I’ve noticed that the lazy-Greeks explanation seems to have a fair amount of appeal in Germany.

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