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."