The Hungarian government and the IMF: Before the markets get carried away

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. 

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Paul
Guest

As far as I’m aware, there are only two sorts of help available from the IMF: immediate loans, and credit lines – i.e. loans that can be drawn down as and when needed. Presumably it is this second category that they are pretending is something new, invented by OV in his great wisdom and cunning.
But what this looks like most of all is a rather silly attempt to comfort the markets and prevent the headlong drop of the forint. And it’s worked, at least in the short term. But the markets aren’t stupid and they’ll pretty soon realise they’ve been duped.
I suspect it will backfire. They are trying to make Hungary look more stable, but all they’re doing is reminding everyone what a chancer OV is and what a bunch of cowboys are ‘running’ the country.

Eva S. Balogh
Guest

Paul: “I suspect it will backfire.”
I’m sure that this is what’s going to happen. In the last half an hour I heard that the Hungarian government had gotten wind of S&P’s plan to downgrade Hungarian bonds to junk status tomorrow. That’s why the great hurry to announce negotiations about which the IMF doesn’t know anything.

Törpefejű
Guest

Myself, I’m convinced that the Viktator really does want to make Hungary into the ‘Magyar Autonomous Zone of China’ within Europe, i.e. Xinjiang West. Yet at the same time the IMF really has been as rapacious towards Hungary as it was towards Latin America – and however much you want to disagree with the Little Putin, you’d have to admit that the average working-class Hungarian does see that capitalism – under right or left governments – has been a real buggering.

Member

@Torpefeju I LOVE your cynicism! You are as Hungarian as it gets 🙂 I can’t see the voracious, greedy nature of the IMF, but I agree that the average blue collar guy in Hungary has no idea if he lives in socialism, capitalism or bugger-ism. Very depressing …

peter litvanyi
Guest
Dear everyone, First let me share a song and here it is: Second, we are way too fast here for my taste. So let’s get back to local food production. I think we all have an issue to debate here /to start with/. Global problems require locally initiated global answers; if it is afflicted to a particular /say Hungary/ victim they might think it is a local issue. Well, it’s not. I owe an answer: to “some1″,”mutt”, “ron” /we absolutely must talk/;”wolfi” and “an”, “pete h”. I would like to comment on what you all said. It is our duty to figure it out. Unless we come to a deep understanding of our mutual ideas /not necessarily an agreement but a compromise of some sort/ how can we advise anyone else? Perhaps we can’t and then our ways part. At that point we certainly have no right to interfere with anyone’s business including Mr Orban’s. We failed amongst ourselves to begin with. Last let us thank Eva for making this conversation possible. Full stop. I shall post my responses under the “Plazastop” entry. We can’t fight for anything, can’t hope to achieve change unless we disclose our name. One person,… Read more »
peter litvanyi
Guest

Dear Eva,
less and less people do business with IMF. The exact figures are in Naomi Klein’s book I already recommended to you as well as others.
Sincerely:
Peter Litvanyi

Hoping
Guest

Would it be too cynical to suggest that the IMF announcement was engineered with the intention of it being the last opportunity for the great leader + “friends” to pre-warn their personal forex traders of a momentary improvement in the HUF/EUR exchange rate so that they can make a last ditch transaction at a slightly better rate of their rapidly devaluing Forints into Euros, before the monumental crash that is coming after the junky downgrade?

nwo
Guest

The Hungarian Govt met with S&P in the last week, and it finally dawned on them that junk status is inevitable. Trying at this moment to re engage with the IMF is a way to try and stall the inevitable. I very much doubt it will work. For the Government, however, i feel they may have fallen into the ultimate trap. Just think what happens now if an announcement comes out in coming weeks/month that discussions on a “new type of cooperation” have ended without any such cooperation. The Govt either needs to do a deal with the IMF, which from their perspective will be humiliating and painful, or the total bottom falls out of the HUF and the bond market blows up. A very merry early Xmas for Mr Matolcsy!

Eva S. Balogh
Guest

Peter L: “Dear Eva, less and less people do business with IMF. The exact figures are in Naomi Klein’s book I already recommended to you as well as others.”
Well, Hungary didn’t have to either but the markets didn’t like Hungary’s unorthodox methods and didn’t want to buy her government bonds. Or, if they did the interest rate was over 8%. As opposed to about half of that amount if Hungary borrows from the IMF. One can choose.

Eva S. Balogh
Guest

To Hoping–yes, there are voices like that but I rather think that the truth lies somewhere else. S&P apparently was going to downgrade Hungary’s bonds to junk status today. That’s why the hurried announcement before they approached the IMF.

Eva S. Balogh
Guest

To nwo: I think you are on target. That’s exactly what happened and the Hungarian government might end up empty handed or further will have change the current story about the new kind of cooperation.

Member

Is there a figure and data available somewhere about how the HUngarian Government’s mandatory retirement saving scheme is performing? Is there a yearly or six months data somewhere? I tried to find it but I cannot. Thanks.

An
Guest

I think it is possible that they are just trying to buy time with this move, hoping to calm down the markets with the prospect of an IMF deal … I doubt they seriously want to have a deal, as it most likely comes with conditions attached.
I don’t think that either Matolcsy or Orban thinks that their “economy policy” failed, quite the contrary, they actually do believe that their policy was the right one, only the international economic environment turned sour and made their plan difficult to accomplish under the current circumstances.
So one possibility is that they enter into negotiations with the IMF and try to drag these out, possibly for months, without actually closing a deal. By doing this, they hope to buy time, avoid further weakening of the forint and the imminent downgrade, until, they think, the EU’s economic troubles are sorted out. Then, having a more favorable international economic environment, Hungary may not need the IMF assistance anymore to finance itself (at least, they think that such scenario is possible).
Other option is that they are hoping to get some kind of a deal from IMF with no strings attached…. good luck with that.

An
Guest

This who story reminds me of a Hungarian joke about the mean little pig (there are a series of such jokes, kind incomprehensible for foreigners).
The mean little pig rides his bike and doesn’t notice a stone on the road. He runs his bike to the stone and falls off his bike. He hits himself badly, lies on the ground for a couple of seconds, then tries to get up, when the good fairy appears. “Hey, mean little pig, do you need any help? You had a rough fall”, she says. “Shut up”, answers the pig, “this is how I usually get off”.

Kirsten
Guest

@Törpefejű: With all due respect to Hungarian cynicism, why has the average and not so average Hungarian Joe not yet tried to find out exactly why capitalism Hungarian style was so “successful”? It sounds so “clear” that it could be “capitalism” that brought this hardship but it could equally be a misunderstanding or outright lack of knowledge about what exactly are the preconditions of a “success story”. These seem to be insufficiently known, which is why capitalism, socialism, Chinaism and Orbanism will all have the same sorry outcome for the average people.

Paul
Guest

An – that was my first ever Hungarian joke!
Inventing ‘agresszív kismalac’ jokes has become a family tradition.
Agresszív kismalac Orbán is standing in his palatial Buda home surveying the wreckage of the Hungarian economy, when the Good Fairy appears.
“Never mind, Viktor”, says the Good Fairy, “I’m sure we can put it back together.”
“Put it back together?”, say agresszív kismalac Orbán, “I meant it to look like this!”.
He even has his own Facebook page: http://www.facebook.com/apps/application.php?id=124758210890385

Paul
Guest
“The Hungarian economy is financing itself from the market, we do not rely on the benevolence of others. Thereby the period of renewal has closed and that of growth has begun for which we must take advantage of all possible means” They are spinning this so fast it makes your eyes water! Here’s more: “Asked about the possibility that the IMF might set conditions, Mr Orban said: “we shall see, I do not really think that in the current state of the Hungarian economy, which now rests on solid fundamentals, we would need a loan. If we need money, we go to the financial markets, issue government securities, bonds and bills, which will be bought”. The only problem is that, due to the euro crisis, yields are rising across Europe, thus, higher interest rates must be paid than before, Mr Orban said, adding that Hungary is financially secure, its government securities are purchased and creditors trust that the country will be able to repay these, but that requires good economic performance. Mr Orban did not exclude a downward review of the 1.5% growth projection for 2012 after a review of Germany’s prospects for next year was completed. Both the EU… Read more »
Minusio
Guest

So, in short: The IMF won’t do anything whatsoever on Orbán’s terms. And HUF gained 3 forint just for one day – just on the hot air the communiqué produced.
I wonder what “Hungarian Voice”, the alias of Dr. Michael Pießkalla, lawyer in Munich, will finally say about this development. He has always been so optimistic (or at least defensive) about Orbán. Mostly he criticised the “style” of the messengers of bad news. He also blocked commentators. At the moment it seems he is escaping to secondary theatres.

Paul
Guest

“Hungary co-operation with IMF looks difficult to impossible”
Interesting analysis piece on portfolio.hu (posted today):
http://www.portfolio.hu/en/economy/analyst_view_hungary_co-operation_with_imf_looks_difficult_to_impossible_nomura.23287.html

Paul
Guest

“The country is spiraling back into the bottomless abyss with incalculable consequences.”
Gábor Vona calls on the government to resign and call early election:
http://www.hungarianambiance.com/2011/11/gabor-vona-called-upon-government-to.html
PS – you may want to wash out your PC after reading this. Here’s an example of what you can find on this site:
“The forces of darkness launched a general assault on the Hungarian government by attacking the local currency by using credit rating agencies that are functioning as death squads for the banking elite.”
You couldn’t make this stuff up!

Kirsten
Guest

Paul, I need not wonder any more why life is so hard for ordinary Hungarians. It is the “forces of darkness”, the embodiment of evil, the hidden banking elite! I very much hope that the part of the society that is still in possession of their rational senses will now make a real effort and devise some sensible steps out of this calamity. With the IMF back and OV in such a precarious situation, chances appear quite substantial that the early elections that Jobbik demands could be pushed through.
I read aggressziv kismalac jokes today for the first time. I find it reassuring that people are aware of this apparent predisposition to running one’s head against a wall.

Member

Kirsten: ” It is the “forces of darkness”, the embodiment of evil, the hidden banking elite! ”
Oh no Kirsten! Someone please call Mr Lucas, I think someone stole his Starwars VII script.

peter litvanyi
Guest

Dear Eva,
“As opposed to about half of that amount if Hungary borrows from the IMF. One can choose.”-another factor to consider is what demands the lender attaches to the loan. Did you perhaps forgot that part? Should I spell it out?
Sincerely:
Peter

Eva S. Balogh
Guest

Peter L: “One can choose.”-another factor to consider is what demands the lender attaches to the loan. Did you perhaps forgot that part? ”
I’ll tell you what. Responsible financial policy.

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