Hungary’s sovereign debt: The bogus problem

Viktor Orbán, who is a cunning politician, decided that he will use the relatively high national debt as an excuse for the austerity program he was forced to introduce. Although Hungary’s sovereign debt is indeed high, the problem it will cause in the long run is a great deal less dire than Orbán is trying to make out. According to practically all economists with the possible exception of György Matolcsy, the fiscal problems Hungary is encountering are not the result of the national debt but of the negative impact of the flat tax introduced by the Orbán government. Estimates I read of missing tax revenues vary from 500 billion to 900 billion.

This shortfall required the government to take up more loans, thus adding to the country’s sovereign debt which about a year ago was 78% of the GDP and which by now has reached 81%. And, oh yes, there’s the 500 billion forints the government spent on the purchase of a 21.3% share in MOL. I heard that the MOL purchase added another 2% to the national debt.

However one parses the numbers, surely Orbán knows well enough that the sovereign debt is not such a burning issue as he is trying to make it out to be. It is a political tool that is being used to justify the very severe economic measures that must be undertaken in order to fulfill Hungary’s obligations promised to and demanded by the European Union. Hungary must have a budget deficit under 3%. As it stands now, without the one-time infusion of money from the nationalization of private pension funds and the bank tax, the actual deficit would have grown from 2.9% at the time Orbán became prime minister to 4.3%. In brief, the deficit grew and so did the sovereign debt.

You may find the following map highlighting the sovereign debts of countries worldwide interesting:

 

Thus Hungary’s situation is not worse than that of France, Germany, or Canada. And the prime ministers of these countries aren’t declaring “a war on the debt that is a question of life or death.” On the flip side, just because, for example, Mexico’s debt load is relatively small doesn’t make the country an economic paradise. An old example would be Ceauşescu’s Romania where people were starving but the country paid back all its foreign loans.

Now Orbán has promised that in one fell swoop Hungary very shortly will pay back a big chunk of its debt: from 81% soon enough it will be 77%. Apparently, some of the money received from the pension funds of millions of Hungarian citizens will be spent on debt reduction, which will be hailed as a stupendous achievement of the government.

And if the bloated national debt threatens to ruin the country and reducing it is a life or death struggle, one must find culprits for this dire situation. Thus a new subcommittee under the parliamentary committee on the budget was created with a huge Fidesz-Christian Democratic-Jobbik majority. At the outset it was announced that the search for the people responsible for the large sovereign debt will start with hearings at which three former prime ministers will have to appear: Péter Medgyessy, Ferenc Gyurcsány, and Gordon Bajnai. As everybody knows, the spectacular growth of the national debt began in the second half of the first Orbán government, but somehow the members of the subcommittee didn’t think that they might ask the current prime minister what he did between 2000 and 2002 with the national debt.

It was on May 10 that the subcommittee heard what Péter Medgyessy had to say about his role in the so-called “debt crisis.” Almost everybody thinks that the greatest culprit in taking up loans to cover social services was Medgyessy, but the former prime minister had a very different take on the matter. At the end of 2004, he claimed, the debt load was 59% of the GDP, well below EU requirements. He emphasized that during the two years while he was in office (2002-2004) the deficit in fact decreased from 8.9% to 6.4%. He admitted that in 2002 the debt grew from 51% to 55% but only because the government changed the accounting system following international standards. As for his decision to raise public employees’ wages by 50%, the amount spent added only 1% to the debt load. He also mentioned earlier decisions made by the Orbán government to provide very generous subsidies for real estate purchases.

Then on May 31 it was Bajnai’s turn. He didn’t claim that his government managed to stop the growth of the country’s sovereign debt. Only that “it managed to slow the rate of its growth.” He emphasized that the rather spectacular growth of the national debt between 2001 and 2006 had two primary causes: fast growing expenditures and a slowing economy. He noted that his predecessor’s government also introduced serious austerity measures but they “didn’t reach the critical mass” necessary for stopping the growth of indebtedness.

From all this Péter Szijjártó, who happens to be deputy chairman of the subcommittee, drew the conclusion that it was during the Gyurcsány premiership that the growth of the national debt became unprecedented. Bajnai was quick to point out that it would be incorrect to interpret his description of the history of Hungary’s sovereign debt between 2001 and 2008 as blaming previous governments or as claiming that the sovereign debt didn’t grow during his premiership.

Finally it was Ferenc Gyurcsány’s turn today. He told the members of the subcommittee that the responsibility for the growth of the national debt between 2000 and 2010 must be born by three governments: the first Orbán government, the Medgyessy government, and the first Gyurcsány government. Viktor Orbán in preparation for the 2002 elections introduced some legislation that added 570 billion forints to the budget. Medgyessy added 817 billion forints with his generous benefits to public employees and pensioners while the first Gyurcsány government added another 512 billion forints. That meant 1,900 billion in additional expenditures. However, he added, in 2006 there was a real change in economic policy that aimed at lowering the deficit and lowering the national debt.

Szijjártó has a single aim: to make sure that everybody understands that it is Gyurcsány who was the culprit. On the basis of the three hearings with the former prime ministers Szijjártó came to the conclusion that since Medgyessy denies that he was in any way responsible and Gordon Bajnai simply talked about the structural changes he made, the incredible debt could be accumulated only by Gyurcsány. Interesting logic: just because Medgyessy denies his responsibility he is not responsible. Szijjártó’s colleague, Mihály Babák, went farther. Gyurcsány is actually responsible for the whole eight years because he “filled important posts even before he became prime minister.” Let me add that Gyurcsány was sports minister for a short period before he assumed the post of prime minister. So, he couldn’t possibly have had much to do with national debt or budgetary matters.

The representative of Jobbik, Balázs Lenhardt, went farther yet. He called Gyurcsány “a shameless mafioso” whose “questionable affairs could be listed all day long.” Listening to “the apostle of lies” will change nothing. “Hungarian democracy is bankrupt and as long as Ferenc Gyurcsány is not an inmate in a prison cell there will be no real change. Until then there will be only revolutionary clowns, revolutionaries of the voting booths, and demonstrations of fags.”

This how things are going in the Hungarian parliament.

 

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Paul
Guest

Makes you wonder if Balázs Lenhardt posts on here as Johnny Boy.

Paul
Guest
Apologies in advance to everyone for going completely off-topic, but I need to apologise to Ron for never answering his question about the Montreal Metro some weeks ago. Unfortunately, the events that led to my spending some time away from HS began that very evening, so I was never able to reply. I have since checked the link you gave and looked into the question of the various braking systems on metros (although this is not exactly an area that fascinates me!). But I feel a reply here would a) be incredibly long and boring to most readers, and b) because of the combination of the unreliability of Wikipedia articles and the infamous age of the Montreal Metro’s rolling stock (their trains are some of the oldest in the world), probably wouldn’t have much relevance to the BKV/Alstom situation anyway. I’m happy to discuss this further next time Éva returns to the BKV fiasco, but, in the meantime, I think it’s fairly safe to assume that the BKV/Alstom ‘dispute’ has very little to do with real technical issues anyway. It’s just the normal combination of Hungarian State business’ ineptitude and corruption, made worse than usual by the recent meddling of… Read more »
Johnny Boy
Guest

Another miserable attempt at whitewashing Gyurcsány’s government who are responsible for Hungary’s immense government debt.
Total lack of basic economic knowledge to show a world map and show that there are a few countries where this debt is higher.
Hungary needs to compete within the region where we are about the last.
You should stop posting articles on economic matters.

Member

Johnny, you lost me. How do we compete with the national debt in the region?
Also what part of Eva’s numbers do you suspect are incorrect?

Paul
Guest

It’s quite funny the way ‘Johnny”s English collapses as he gets wound up.
I imagine him sitting at his PC, whacking the keys and spitting bile at the screen!
A sad and lonely little man, but he keeps us amused.

peter litvanyi
Guest

Well, Mr Orban is not alone to use the “deficit” excuse to obliterate the social gains of generations.
http://www.oureurope.org/9479.html
Flat tax is an outrageous idea, of course.
I also wouldn’t obsess about Gyurcsany Feri either: he was just another servant of the rich. An aspiring Tony “BLIAR”.
Peter Litvanyi

LEGYEK-E-MAGYAR-TOVABBRA?
Guest
LEGYEK-E-MAGYAR-TOVABBRA?

the flat tax has put an unbearable burden on the low income Hungarian citizens, and has reduced the taxation of the rich.
================
the orban madness can serve as a warning to america.
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orban was surely bribed by a few ultra rich for this tax gift to them. the damage will be felt by all.
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how could an orban trick so many voters?
================

Ron
Guest

Paul, Thanks for not forgetting me about the brakes. I agree that the “high standards” are merely a political issue. But I do not know too much about technical things.
As to the article of the professor and the comments. There is one thing missing. I wonder whether this was mentioned during the hearings. The political responsibility for not having the Fgy government to implement some debt reducing measures. Everytime he wanted to do something they went to the Constitutional Court to block it. Are they not responsible as well? I believe so.

Odin's lost eye
Guest
I have often wondered why OV is so obsessed with hammering Mr Gyurcsány and why His Mightiness is spending so much time and effort to lock him away. I would love to hear our pet troll about the real reasons for this. By the way Peter was the name ‘Bliar’ deliberately misspelt of was it a ‘typo’? I hope it was not a ‘typo’! I disliked the little toad and his mate Macavity (aka Mr Broon). Paul your remarks about out ‘pet troll’ are a little misplaced. He is using an old communist made ‘Bunk o matic’ which Fidesz found during their first term in office. It was subsequently ‘restored’ as a museum object (paid for by the EU). If you will pardon the pun, the restoration was done in India by that well known company Ram Shackle Engineers Ltd. Johnny Boy you write ** “Total lack of basic economic knowledge to show a world map and show that there are a few countries where this debt is higher. Hungary needs to compete within the region where we are about the last.” ** What a curious statement, what do you mean? You write ** “Hungary needs to compete within the… Read more »
Eva S. Balogh
Guest

Legyek: “orban was surely bribed by a few ultra rich for this tax gift to them. the damage will be felt by all.”
This is what happens when you get “gifts.” You pay for them later. Except in this case not Fidesz has to pay back or Viktor Orbán but the Hungarian people. Meanwhile OTP is expanding to Central Asia of all places.

Kirsten
Guest

Ron and Odin, “I also doubt that the Hungarian public ever noticed it.”
That sounds unbelievable to me because it was such a big issue at that time plus referendum with a turnout of 50% of the voters and of these 80% voted against the fees. I do think that the Hungarian debt and deficit policies are a problem (I think that I wrote the reasons already) but that the “society” has its fair share of responsibility for it. It has been systematic for many years including the Kadar period.
It is telling that Fidesz considers the prime ministers to be the ones responsible for debt, not parliaments who adopt the budgets for every year. The current parliament works exactly in this fashion. So OV should get prepared he might be judged by his own standards.

NWO
Guest
Eva- I believe you are completely wrong in your assessment that debt at above 70% of GDP is not a risk (long and short term for Hungary). Did you forget already that in Sept 2008, the only way the Hungarian Govt was able to finance the maturing debt was through an IMF/EU bail out? The debt is a long term tax on the population, and remains a massive transfer of wealth from the generations incurring the debt to those that need to pay it back. Due to the debt burden, Hungary had to employ a serious fiscal tightening in the midst of the worst recession in generation (when other healthier countries without the debt burden-Cz Rep and Poland for example) where able to employ traditional fiscal deficits to keep up the their economies. Comparing Hu to France and Germany in terms of debt size and arguing that demonstrates this is not a big issue for Hu, it ludicrous. First of all, their economies are far more competitive. Second, they actually have a domestic market in which to sell their debt securities. Hungary must rely on foreigners to finance its debt. I do not think the flat tax is a panacea,… Read more »
Eva S. Balogh
Guest

NWO: “I believe you are completely wrong in your assessment that debt at above 70% of GDP is not a risk (long and short term for Hungary).”
Sure, it would be very good if the debt load were smaller but it is not “life or death” question. Orbán simply uses the issue to justify the non-austerity package of his so-ccalled “reorganization of the country.”

Kirsten
Guest

I agree with NWO on that this is a rather serious problem (even if OV perhaps uses it shamelessly for his personal agenda). There were already moments (such as in 1995, 2006, 2008) where it was kind of a “life or death” question. The proposals how to deal with the private debt in foreign currency are related to it because the exchange rate can be volatile when there is uncertainty about the public debt. It is not just about the size of the public debt.

Johnny Boy
Guest

Mutt what is so difficult to understand? Our government debt is the highest in our region, and we must remain competitive in our own region.
If you don’t understand how government debt relates to competitiveness, I suggest an “Economy for dummies” book.

Member

Thanks Johnny, I will definitely read it.
My wife says as long as I keep a steady job we don’t have worry about the maxed out credit cards. She also says if I get canned and spend my time in bars with my buddies then I should not bull shit her about the maxed out credit cards because that’s not the problem. And if I don’t bring home the bacon she’ll kick me out no matter what our credit score is. Sorry, I have to go .. my shift start at Mickey D. Free food.

Johnny Boy
Guest

I suggest you present your wise wife with the idea of grinding down your credit card completely.

Paul
Guest

Odin’s – re brakes, have a look at this: http://en.wikipedia.org/wiki/Electromagnetic_brake I think it will appeal.
By way of explanation – the link Ron gave in his original post led to a Wiki page about the Montreal Metro and Ron’s question was specifically about the braking systems used on that system.
I was puzzled to discover that (according to Wiki, at least) they had three different systems (on the same train!), and that one of them was ‘electromagnetic’, which seemed a bit unlikely. So I followed the Wiki link and found myself on the above page.
It’s actually about electro-mechanical braking systems, not electromagnetic, so wasn’t much use to me, but I think, as an engineer, you’ll find it very interesting. I had no idea there were so many types of braking systems or that they were used so widely – a whole new world to me!

peter litvanyi
Guest

Dear Odin’s:
“Do you have a similar map which shows the ‘rates’ charges by lenders?”-this is actually a very important point.
Nah, it wasn’t a typo.

Odin's lost eye
Guest
Peter Litvanyi . Thanks, I am glad it was not a typo. Did you get the reference to ‘Macavity’. It is a poem by T.S.Eliot which I think fits Broon to a ‘T’. You quite rightly say the rates charged are very important. These reflect the lender’s view of the risk of not getting his money back. There is a very important rule of the ‘Market Place’ (ignored by Economists) it is “The Seller will always get as much for his goods as he thinks he can, and the buyer will pay as much as he can afford.” I know it is trite but if the buyer fails to pay up the seller has given his goods/services away. If a potential lender feels he might have to take a ’Haircut’ he will not lend except at an exorbitant rate. This is to allow him to recover his loan early before it all goes pear shaped. Kirsten The people voted to against the ‘Medical Charges’, but they did not connect them to the economic situation. The Government Publicity Department did not spell out ‘large’ that the chronically sick could get their charges refunded. Or if it did it was drowned out… Read more »
Paul
Guest

Odin’s – at the risk of boring everyone senseless about metro braking systems (a risk I am prepared to take!) – they have regenerative brakes as well.
In fact, according to the ever reliable Wikipedia, they have THREE separate braking systems: regenerative, conventional and ‘electromagnetic’. Although the article never actually mentions all three together.
Also, it claims that the ‘electromagnetic’ brakes work by “create(ing) retarding forces against the side rails of the track”. I’m no expert on this, but my understanding of this sort of brake is that you need a fair amount of electronics/electro-mechanics on the rail for this to work, you can’t just get an ordinary steel rail to ‘passively’ act as half an electromagnetic brake.
So, as so often with Wikipedia, we are left with more confusion than enlightenment.
One last thing – I’m puzzled that our friendly troll hasn’t posted about this, as he claims to be a metro engineer. Perhaps he’s waiting for his puppet masters to give him the steer on the ‘correct’ political stance to take on metro braking?

peter litvanyi
Guest

Dear Odin’s,
“Cats”, I think. I actually know T.S. quite well. No, not right away. Talk soon.
Peter

Odin's lost eye
Guest

Paul to ease your confusion there are 4 breaking systems on electric rail vehicle.
The normal electro/mechanical wheel breaks which use friction to convert the kinetic energy of the vehicle into heat –like in your car.
The regenerative break, where the drive motor is turned into a generator. This absorbs the kinetic energy of the vehicle.
The electromagnetic break, which at its simplest is a large electro magnet. This takes power from the power supply and clamps itself to the rails. It again converts kinetic energy to heat.
The fourth is the good old ‘Man-draulic’ system where a man tightens a screw thread (or some such) and applies wheel breaks and sometimes rail brakes which physically grip the rails.
Sorry to all for this post.

Ron
Guest

As for his decision to raise public employees’ wages by 50%, the amount spent added only 1% to the debt load.
This does not make sense. The salary hike took place in September 2002, so 1% increase for 2002, is 4% for 2003. However, Fidesz increased the salaries of the teachers and army officers as well with approximately 50%. See link of OECD report page 8 http://www.oecd.org/dataoecd/53/12/40140155.pdf.

supra vaider
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I also follow through Google Reader!

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It’s a shame that more people are not looking for journalists in English! Maybe I should point them to this blog. Thank you for taking the time to write.

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