Yesterday’s big news was S&P’s decision to downgrade Hungary’s bonds to junk status. Thus, out of the three credit rating agencies, two have already moved to warn investors about the risks they take when they buy Hungarian government bonds even though the yield might be high. Just today one could buy 12-month bonds with a yield of almost 8%. But there were relatively few takers.
What did S&P give as the reasons for its decision? First and foremost, the Orbán government’s economic policies “are increasingly erratic” partly because of the actual steps the government has taken and partly because of the questionable independence of the very institutions that are supposed to supervise the government’s financial decisions. S&P specifically noted that the recent changes in the constitution and within supposedly independent organizations have weakened the effectiveness of the country’s institutional system. S&P brought up the question of the new government-appointed members of the Monetary Council of the Hungarian National Bank which in their view further weakens the independence of the central bank. But that is not the only problem. In the pending bill on the status of the central bank further “innovations” are planned. The deputy governors who are currently chosen by the chairman of the central bank from now on would be appointed by the president of the country on the recommendation of the prime minister. Two new members would be added to the Monetary Council, which would make it a body of nine members instead of seven.
S&P also pointed out that some of the government’s moves instead of encouraging economic growth in fact retard the country’s growth potential. The agency specifically mentioned in this respect the high extra levies on the communications industry, the energy and retail sectors, and the financial institutions. Next year, when Hungary will have to start paying back its debt to the International Monetary Fund and the European Union, the country may have serious financial difficulties in meeting its obligations.
These were rather specific complaints pointing to an economic policy that is erratic and works against economic growth. Therefore, it is interesting to see how these reasons for the downgrade were interpreted by Péter Szijjártó who is more and more often described as “Viktor Orbán’s Hungarian voice.” In “translation” interesting things can happen.
According to Viktor Orbán’s personal spokesman the downgrade was “in no way justified by the real economic processes.” The downgrade “is more about the crisis of the euro than about Hungary.” After explaining the downgrade to the reporters who gathered to hear “Viktor Orbán’s Hungarian voice,” he outlined the tremendous accomplishments of the Hungarian government. Hungary managed to decrease its debt load, it will be among the very few countries whose deficit will be under three percent, and “many thousand more people work today than a year ago.” It would be nice if if these assertions were true. But the national debt in fact has been growing in the last few months due to the weakening of the Hungarian forint. As for the deficit, analysts are almost sure that it will be 3.5%, above the threshold that would put Hungary on the road toward joining the eurozone. As for the thousands of additional people working. Yes, it is true in the private sector but fewer people are working in the public sector and thus the level of unemployment hasn’t moved at all since the Orbán government took over the reins of power. I may also add that, according to some, the inflation rate might be around 5%. Much higher than originally anticipated.
Finally, Szijjártó reiterated that these successful policies will be continued unchanged in the future. The country’s “renewal and reorganization are continuing and thus Hungary will be one of the most competitive countries in Europe.”
As to the question of when Viktor Orbán will answer José Manuel Barroso’s letter, “the answer will be sent in due course.”
But what will the answer to Barroso’s demand “to withdraw the two cardinal laws [on the Hungarian National Bank and the law on financial stability] from Parliament” be? Viviane Reding, EU commissioner for Justice, Fundamental Rights and Citizenship, also urged the Hungarian government in her letter to Deputy Prime Minister Tibor Navracsics not to introduce the new constitution and the cardinal laws accompanying it on January 1, 2012.
Szijjártó didn’t reveal the secrets of the Prime Minister’s Office but János Martonyi, foreign minister, spilled the beans yesterday morning in an interview with a reporter of Magyar Rádió. The new constitution will be effective as of January 1, 2012. No postponement and therefore, according to Martonyi, neither the law on the status of the national bank nor the law on financial stability can be postponed. They can be amended or parts of them changed but all this has to be done by the end of the year.
Thus, Orbán will refuse Barroso’s request. The question is what kinds of steps will the European Commission take after this? Tibor Navracsics already refused to oblige Viviane Reding’s request for a postponement of these questionable cardinal laws. Now, after receiving Orbán’s letter, I think it will be crystal clear that the Hungarian government is taking a position that is not conducive to dialogue. Under these circumstances will the IMF-EU delegation return to Budapest in January as was announced prior to these exchanges between the European Union and the Hungarian government? The official word at the moment is that the negotiations are going to take place sometime in January. At least this is what Olivier Bailly, spokesman for the European Union, said this morning. This is also what one hears from the Hungarian government. However, tonight the Budapest representative of the European Union denied the news. According to him no decision was made as yet whether the negotiations will continue at all and if they do when these negotiations will take place. The news from Brussels is more and more ominous.
The Hungarians, according to an MTI headline, “have high hopes for the EU-IMF negotiations.” They may be hopeful but György Matolcsy’s statements of today lead me to believe that either these negotiations will not take place for a while or, if and when they do, they will be really, really rocky. Matolcsy is still talking about “a safety net” and about Hungary’s ability to finance itself from the market. As we know, the chance of getting a precautionary credit line that entails no conditions is out of the realm of possibilities.
The Democratic Coalition has an entirely different opinion from that of the government. Csaba Molnár urged Orbán today to invite the IMF-EU delegation back immediately. Moreover, he suggested that Orbán himself should head the delegation. He warned the government to give up its hope for a precautionary credit line. Hungary most likely will have to be satisfied with the kind of financing the Gyurcsány government received in 2008. If the Hungarian government hesitates or even worse refuses to negotiate with the IMF-EU delegation, Hungary may go bankrupt.
Viktor Orbán will indeed have to make a momentous decision. I admit I have no idea how he will decide. At the moment he doesn’t seem to have a firm grip on reality and it seems that there is no one in his entourage who would have the guts to confront him. Both Martonyi and Navracsics are considered to be among the more moderate Fidesz politicians and yet they slavishly follow the Orbán line. How long can that go on before the country really does collapse financially?