This morning around 11:00 Hungarian time the news spread far and wide that “Hungary [is] open to discuss IMF standby deal” as The Washington Post‘s headline announced. The story itself was based on the report of AP’s local representative. The Wall Street Journal was equally sanguine when it explained to its readers that the Hungarian government was now “willing to discuss a controversial central-bank law that has become a major stumbling block in its efforts to win international approval for a financial safety net.” With due respect to the reporters of AP and The Wall Street Journal, this is sloppy reporting.
Let’s start with the so-called “standby deal” that Viktor Orbán’s government is now ready to discuss. In the first place, there is something very wrong with the translation of “standby credit.” Let’s see what Tamás Fellegi, minister without portfolio in charge of the impending negotiations with the International Monetary Fund and the European Union, actually had to say on the matter. The exact phrase he used was “a precautionary standby credit” that is suddenly “acceptable to Hungary.” I think this whole issue is so important that I would like to quote Fellegi’s exact wording in Hungarian. He talked about “elővigyázatossági készenléti hitel.” The problem is that such an IMF credit line doesn’t exist.
So, if I were one of those financial analysts in London who are so often quoted in the Hungarian press as the final arbiters of all things financial, I would be very careful because I suspect that what Viktor Orbán and his economic team cooked up early this morning is no more than a ruse. How clever it is we don’t know yet, but I somehow doubt that the IMF-EU financial teams will fall for it. Traders, however, seemed to have bought into it because the Hungarian forint, which had reached 324.25 to the euro earlier in the morning in the wake of a one-year bill auction that fell short of its targeted goal and where the average yield was 9.96%, bounced back to 318.71 by 4 p.m. EST. Naive souls.
As soon as I saw the two words “precautionary” and “standby” combined, I suspected that the Hungarian negotiators will try to make a deal with the IMF for a package that is called a “standby credit line” but that is treated as a “precautionary” one. The difference between the two is enormous. Those countries who are deemed worthy of “precautionary credit” are not monitored. No one is breathing down their necks, no one tells them what to do and what not to do. The “informal” IMF-EU negotiations broke down in December over precisely this issue. The IMF and the EU decided some time ago that Hungary’s precarious financial and economic situation didn’t warrant a “precautionary” loan.
My guess is that Fellegi and his fellow negotiators will try to alter the terms of the “standby credit line” and that this is the offer Fellegi is bringing to the IMF next Wednesday when he travels to Washington. I suspect that this first round of conversations will go nowhere and that Fellegi will have to go back to Viktor Orbán for permission to proceed with an ordinary standby loan. Perhaps by then the financial prospects of the country will be sufficiently dire that Orbán might have to give up his cherished ideas of Hungary’s complete sovereignty.
Up to now I focused only on what the Hungarian government would like to have and what it is willing to offer, not on the position of those on whose good will the loan depends. The Wall Street Journal‘s report is entirely wrong when it gives the impression that Hungary’s willingness to discuss the law on the status of the Hungarian National Bank was the only stumbling block to serious discussions on the part of the IMF-EU delegation.
First and foremost, we must understand that the most important partner in any three-way discussions of this loan is the European Union. Hungary as a member of the Union must abide by its laws. The IMF cannot decide anything about any of the Hungarian laws without the EU’s approval. And the European Union didn’t demand a “discussion” of the “controversial bank law” but its withdrawal. José Manuel Barroso, the president of the European Union, made that very clear in his December 19 letter to Viktor Orbán. Moreover, he added that the so-called “law on financial stabilization” should also be abandoned. As we know, Viktor Orbán ignored the request and the Hungarian parliament’s Fidesz-Christian Democratic members duly voted both bills into law. The law on the national bank was changed somewhat but not to the satisfaction, as it turned out, of the European Commission. The law on financial stability was passed unaltered, which means that the Orbán government’s tax system can be changed only by a two-thirds majority. Thus, the next government’s hands will be tied as far as tax policy is concerned.
As for the allegedly startling news that the Hungarian government is willing to discuss the law on the Hungarian National Bank, that is not exactly correct either. Two days ago Viktor Orbán’s spokesman Péter Szijjártó said at a press conference that “if the European Commission thinks that it would wish to consult with the Hungarian government after its members became familiar with the text, we are naturally ready and open to such consultation.” There is a major difference between a discussion about making changes in the law and consultation about an issue.
György Matolcsy, Hungarian Minister of National Economy, wrote his letter
Moreover, today the Hungarian government outright stated that it has no intention of making any changes whatsoever in the bank law passed on December 30, 2011. György Matolcsy wrote a letter to Mario Draghi, the governor of the European Central Bank, in which he explained the details of the Hungarian law. He assured Draghi that the Hungarian government has always been careful in its observance of the Hungarian National Bank’s independence and he added that the Hungarian government has no intention of changing anything in the law until Hungary joins the eurozone. A copy of the letter went to Olli Rehn, European Commissioner for Economic and Financial Affairs.
Mario Draghi, governor of the European Central Bank, received it
So, how seriously can we take Fellegi’s assurances about Hungarian willingness to negotiate in good faith when on the very same day another minister of the same government tells the governor of the ECB that they have no intention of changing a comma in the bank law that has been one of the demands of the IMF-EU negotiating team? The answer is: naturally, not at all.
And finally, those London analysts who keep their eyes only on financial charts, bank laws, and tax laws should realize that the two demands mentioned in Barroso’s letter to Orbán are not the only obstacles in an agreement for a loan, whether precautionary or standby it doesn’t matter. The European Commission has been studying the Hungarian constitution and the cardinal laws. They might make public tomorrow what provisions the EU lawyers find incompatible with European Union laws. I’m sure that they will find plenty to say, for example, about the law governing the judiciary or the media law.
In this case, it is almost certain that the Hungarian government will have to do more than “discuss the controversial bank law” and express its desire for a “precautionary standby loan.” Hungary might seek a quick IMF deal, but wishing doesn’t make it so.