After studying today's announcement by the Hungarian Ministry of Economics about renewed negotiations for "a new type of cooperation" between Hungary and the IMF I came to the conclusion that most commentators misread the announcement. The comments assume that such negotiations have already begun.
Let's look at the key sentence of the announcement which perhaps not surprisingly happens to be the very last of a 352-word text. "We will start negotiations about a new type of cooperation within the framework of the IMF's normal yearly consultation" that is taking place in Budapest at the moment. Let me quote it in the original: "Az IMF szokásos éves gazdaságpolitikai konzultációjának keretében megkezdjük a tárgyalásokat egy új típusú együttműködésről." One must pay attention to the verb here: "megkezdjük." If the Hungarian government had already approached the IMF this verb would be in the past tense (megkezdtük). But as is, it means that these negotiations will take place only in the future.
My suspicion about any ongoing negotiations is supported by two other sources. One is the staff of the IMF delegation who told Reuters that they hadn't received any such request. So, if Matolcsy is negotiating with the IMF, it is not through the delegation currently in Budapest. The other source of my suspicion is that the Hungarian National Bank knows nothing about any negotiations. They learned about the alleged dialogue with the IMF from the ministry's communiqué. And without the participation of the National Bank no deal of any sort can be made because the government and the Central Bank jointly take responsibility for any financial arrangement with the IMF.
Of course, it is possible that the Hungarian government put out feelers earlier. There was at least one brief mention of such a possibility reported by The New York Times. But if that is the case, why is Matolcsy referring to negotiations with the staff of the IMF delegation in Budapest? Especially when members of the delegation told Reuters that "the mission …is not a negotiating mission, but a mission to conduct the regular economic surveillance that the IMF performs for all member countries." Surely, György Matolcsy knows that, or at least he ought to.
I'm not the only one who is skeptical about this alleged deal. Unnamed sources expressed their skepticism. The "new type of cooperation," they say, is most likely a PCL (precautionary credit line) with no strings attached. However, according to a Nomura economist, "the IMF would not give any form of backstop without conditionality, which the Hungarians don't want." A PCL is intended for "crisis prevention purposes by countries with sound fundamentals and policies." It is designed for economically stable countries that may be frozen out of the credit markets at times of international financial turmoil. The Wall Street Journal noted that "it is doubtful that the IMF would regard Hungary as being in that position, since it has a government debt at around 80% of gross domestic product."
Timothy Ash, an analyst at the Royal Bank of Scotland, is also puzzled. According to him, the Hungarians may start negotiations with the IMF, but it is not at all sure whether they will get what they want. "The government is clearly pitching for an FCL (flexible credit line)" because the ministry of economy is talking about "an insurance which will not increase state debt." But, he added that he can't see the IMF agreeing to such an arrangement. Ash is about as skeptical as I am when he says that "the Hungarians are doing this to (a) buy time in the market; (b) maybe see what they can get from the IMF, with an FCL being their starting bid."
The Wall Street Journal reported that "If the government does intend to seek a loan, investors would probably give a warmer welcome to an agreement that gave the IMF more say in guiding the government's economic policy." Neil Shearing, an economist at Capital Economics, put it more bluntly: "The more conditionality the better. The issue is not so much about fiscal policy but the fairly volatile policy environment, the unpredictability."
Political commentators, like Péter Krekó, think that "the government can bend over backwards in trying to frame this as a new type of cooperation and it will give the government greater autonomy than before. But this is their biggest domestic political defeat to date, which will be very difficult to explain."
So, let's see how the government tried to turn defeat into victory. The title of the communiqué is interesting by itself: " Hungary at the turning point." In it we find that the last year and a half was spent on the renewal of the country. Now the government can concentrate on growth. And from here on I should give a translation of the original. "For growth first and foremost we must defend our sovereignty. We must achieve a situation in which Hungary can be financed from the market place. This is difficult to achieve because of the protracted crisis of the eurozone.
"That's why a new type of cooperation with the IMF adjusted to our economic strategy based on self-interest might be a useful instrument for us. [This new type of cooperation] as opposed to the old one will increase our financial-economic independence. This new agreement–as opposed to the old one– will not increase the sovereign debt because we are not talking about a loan. Basically it will be an insurance policy that will increase the security of investment in Hungary. Thus we will be able to initiate–according to our roadmap–a new phase of economic growth."
Perhaps we will know more about all this tomorrow, but for the time being I have the deep suspicion that this is one of those typical Matolcsy-Orbán moves that try to avert an economic downdraft while they are keeping fingers crossed.