The latest Hungarian trick: “precautionary standby credit line”

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.

Matolcsy György

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.

Draghi, Mario

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.

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Member
How can anyone, especially serious journalists take it for granted what any of the Fidesz members officially say? They are the ones who a few months back claimed that they will not sit down with IMF as Hungary does not need any money from them. THe same government later wanted to talk to the IMF under Hungary’s terms as Hungary does not really need the IMF, only just as precautionary measure, and now they are talking about standby deal wit the IMF… Fidesz is the one who nationalized private retirement savings, they are the ones who pushed International banks to take losses on their money they lent to Hungarians, and now they are the ones who try to force banks to write of some of the loans they lent to Hungarian municipalities. Hungarians do not trust their own government when it comes to their money and they are talking their savings across the border to make sure Orban does not put his paws on it. If the IMF thinks that they can strike a deal with Orban that he will not one-sidedly revoke, they are out of their minds. For the EU / IMF to sit down with Orban and… Read more »
I love Hungary
Guest

I don’t know.
Orban is not principled, and if he loses power now, he loses everything (at the personal level).
I could see him trying to climb down right now, having really not known what he was getting himself into, in the first place.
He can actually be a full-blown liberal democrat, when it is advantageous for him to do so. (See 1985 – 1995)

Lutra lutra
Guest

I think http://www.portfolio.hu and http://www.politics.hu have better reporting than the FT, WSJ or BBC. The general perception in senior financial and EU/ECB circles is clearly that Orbán is untrustworthy and unfit to lead a country. From those websites it’s clear that there will be no “negotiations”.

nwo
Guest

I do wonder if the EU would really make broader changes to the Constitution a condition for the acceptance of granting a new financing. My sense is that while there are very deep concerns about Hungary and the fate of democratic institutions here, i am not sure they will fight those battles in the context of new IMF/EU support. Anyway, i agree with you that I do not believe the Hu Govt has come around to the point where they are ready to accept changes to Centrl Bank law and fiscal law just yet. My sense however that Orban may be getting ready to pivot on this, as the realization among the those in power is increasing that they really have nonchoice.

littlelambfound
Guest

I tend to think that Hungary, like all European countries, can only grow its way out of recession. Its not to do with productivity, but profitability. To that end, a weaker HUF can only be advantageous. Business cares not a jot about the colour of politics, just the profits (think China). At some point in the not too distant future, Spain, Italy, Greece and Portugal will have to default. Luckily Hungary is not a Euro member (yes I know much of its debt is FX). But it does appear that, to win the race to the bottom, its probably not such a “bad” thing…as they would have the advantage of cheap production costs and therefore would attract Euro-wide manufacturing…..thus being more able to climb outta the hole that much faster (maybe this is what Europe REALLY fears). Hungary has only limited natural resources. But it does have brains and brawn. Make these assets cheap enough and there’s no reason Hungary cannot become a Euro-centric manufacturing hub. Looking at some of the recent changes to employment law and the way the government behaves leads me to believe that Vicky and me might be reading from the same book!

Odin's Lost Eye
Guest
NOW hi. Some of the bits and bobs in the New Constitution are in direct contravention of EU law, some contravene the ECHR and some are a bit of both. I think that the European Commission has finished giving warnings as now these things are LAW. So now it is down to the courts various European Courts. The IMF is a ‘joint stock company’. Its stockholders are those governments who put money into it. The more money they put in the bigger treir risk is and the more say each one has in how IMF is to work. The IMF has a set of ‘Products’ that will let you have and that is all you can have. What the Viktator wants is not one of those products, but he does not or will not understand this. The rules of the ECB are laid down in the charters which set it up. It cannot and will not go beyond those rules. Sooner the Viktator realises this the better. it is the political controllers of the EU, the Council of Ministers and the European Parliament can take political actions like imposing sanctions on Hungary. Thr European Commision will mearly ‘carry out’ those… Read more »
Andrew
Guest

There was a good article by Robert Peston on the BBC’s website today. The EU and the US have made very clear their concerns about the new policies implemented by the Hungarian government.
However, the bigger picture is one of a contagion of economic disintegration spreading from Hungary to the eurozone and beyond.
Although Fidesz has limited the powers of the media, the judiciary, the constitution, these are in many ways of concern only to Hungarians. Can the IMF and the EU simply stand back and allow Hungary’s economic situation to deteriorate further? The effects would not merely be contained to Hungarians struggling to meet their mortgage payments, or afford groceries.
Sadly, I think Fidesz might be fully aware of this – a case of give us what we want, or we all go down together.

Csoda. Kegy
Guest

@Eva: desire for a “precautionary standby loan.”
Changing the name of what VO is aiming for is good news. When politicians playing hardball start moving the goal-posts, it is a step towards an agreement. Its called blame avoidance.
The next step is generally to find ways to blame the someone else when you have to do something you’ve said you will not. That will be more difficult for VO.
But if Sarkozy buckles to a tough deal with Merkel early next week, VO may find a way to blame the foreigners for his own deal with the EU/IMF.
Short-term effect: Positive (market crisis dodged)
Long-term effect: Negative (VO maintains power)

Gábor
Guest

Éva, this time your criticism is not well-founded, the IMF accords stand-by agreements on a precautionary basis, it is called High Access Precautionary Arrangement. Basically, it is a stand-by agreement, with all conditionality and supervision attached, but the debtor doesn’t draw on the funds.
“Precautionary access. The new SBA framework has expanded the range of high access precautionary arrangements (HAPAs), a type of insurance facility against very large potential financing needs. Precautionary arrangements are used when countries do not intend to draw on approved amounts, but retain the option to do so should they need it. Three HAPAs, with Costa Rica, El Salvador, and Guatemala, were approved during the crisis.”
http://www.imf.org/external/np/exr/facts/sba.htm

Lutra lutra
Guest

@Gabor, my understanding is that Orbán wanted to avoid “all conditionality and supervision”. As such, HAPAs won’t meet his demands either.
I see the Forint is stabilising but if there’s no sign of an agreement next week I wouldn’t be surprised to see it around 350 by the end of the month.

Gábor
Guest
@Andrew: “Sadly, I think Fidesz might be fully aware of this – a case of give us what we want, or we all go down together.” I see your point, but during the last two years there was only one politician in Europe, how always got what she wanted, while the others bowed to her: Angela Merkel. However frightening the Italian, Greek, Spanish, Irish situation looked she was capable to sit out anyone and I’m convinced she would be able to do it with Orbán too. On the other hand Orbán’s problem is at the moment internal. If he could drag negotiations until he can make the conversion of fx-based loans he could have a chance – a default on external debt, without affecting Hungarians, at least as he probably imagines – he can play this game. But it is not the case at the moment and his situation is aggravated by other developments the starting run on the banks (such an event alone can bring down his government), rising rates of forint based credit, completely eliminating any gains for those who converted their fx-loans. It is not certain he can avoid an implosion or explosion in Hungary before he… Read more »
Gábor
Guest

@Lutra lutra, that’s why Fellegi’s words gave relief to the markets. I’m still not sure Orbán really will accept the stand-by agreement, but with every such small move it is harder for him to turn his back on the EU and IMF. Seeing what happened yesterday, it is clear he won’t have the three-four months to drag the negotiations he probably hoped for.

GW
Guest

With so much on the table in the EU at the moments, at a certain point, the net contributors to the EU may well just abandon the annoyance of dealing with an aggressively non-cooperative Hungarian government. Hungary needs the EU far more than the EU needs Hungary. Hungary is among the four largest recipients of EU monies in terms of percentage of GDP (ca 2.7 percent) and Hungary is not offering much to the EU in return that could not be replaced elsewhere.
While one well understands the desire to maintain and express independence both politically and economically, one also has to play with the hand one is dealt and within the rules everyone accepts. The alternative is isolation like Belorus, or isolation and quasi-colonial status like North Korea.

Csoda. Kegy
Guest

@ Lutra: “I wouldn’t be surprised to see it around 350 by the end of the month.” Agreed
For anyone who wants to see the government’s general position expressed in less combative terms, I recommend: http://online.wsj.com/article/SB10001424052970203462304577138453060597254.html
And here is the way the German press has dumbed down the issues for children: http://videa.hu/videok/nagyvilag/zdf-magyarazza-az-alkotmanyt-alkotmanyozas-kormanyellenes-tuntetes-Nkd7sgWCd97wsXuo (in German / Hungarian, but the graphics are self explanatory). 🙂

Paul
Guest
littlelambfound makes an important point. Although the collapse of the forint looks like an economic disaster, as long as it doesn’t lead to a more catastrophic ‘chain reaction’, it could well be a good thing for Hungary. Mark (if only he were around now) was of the opinion that the forint was being held at an artificially high rate and it would be better for the economy (at least in the medium/long term) if it were allowed to find its realistic value. In the UK, we went through a period of severe devaluation of the Pound in the 60s – Wilson’s infamous “the pound in your purse or pocket”. But Wilson was broadly right – it didn’t make that much difference to the man and woman on the street. Things got harder, imports got dearer, but nothing like to the extent that the doom-mongers were predicting. And the devaluation did a great deal to help our exports and stabilise the economy. When I was a kid, a half-crown (2/6 or 12.5p) was known as ‘half a dollar’ – in recent memory the pound had been worth 4 dollars. In the late 60s (post-Wilson’s devaluation) the Pound was worth just $2.4… Read more »
Paul
Guest

OT – but someone asked about Tibor Fischer the other day. This should tell you all you need to know about him:
http://www.telegraph.co.uk/news/worldnews/europe/hungary/8995365/Viktor-Orban-Hungarys-political-daredevil-will-be-judged-by-results.html
Unfortunately, he is our ‘tame Hungarian’ in the UK, so is always the first person editors go to for an opinion on Hungary.

An
Guest

Paul, just don’t forget there is a difference between a carefully managed currency devaluation strategy (which in certain cases can be beneficial to a country) and the tanking of a currency due to incompetent economic policies. The latter one is a sudden panicky reaction with unintended and unforeseen consequences.
In Hungary, though the government may have the first one in mind, so far only managed to achieve the second. Now they try to do some damage control (OV’s today speech about the necessity of the IMF deal).
In the case of Hungary though, even strategic devaluation of the forint can only be beneficial if the country first gets rid of the huge debts hold in CHF and EUROs. It is obvious that the government was taking steps trying to tackle the issue, but it is still far from being solved…. now attention is starting to turn to the forex debts hold by municipalities.

Andrew
Guest

@ Paul: “Although the collapse of the forint looks like an economic disaster, as long as it doesn’t lead to a more catastrophic ‘chain reaction’, it could well be a good thing for Hungary.”
You may well be right that things need to get a lot worse before people wake up, or policymakers feel the need to reverse their policies. But until then, people with debts in foreign currencies will be in trouble. Also, prices are rising. Foreign-owned shops like Tesco, Spar, Rossmann, etc. import their products from outside Hungary. Just take a walk around the centre of Budapest to see how many ‘Kiado’ signs are in the windows of suddenly deserted shops/cafes.

Condor
Guest

Right on spot, An.
Devaluing a currency also has a side-effect: imports are going to be much more expensive. Hungary was not exactly an oil and gas producing superpower last time I checked. It did not have the exporting might of a country like Japan ether. Not to mention that its biggest export market (EU) has not exactly been on a buying spree lately either.

Condor
Guest

Latest from Bloomberg. Speechless …
“The President can count on the government’s support, including our backing for him personally,” Orban said after meeting Simor in Budapest. The government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank to stabilize the economy, Orban said.

Ron
Guest

Condor: Latest from Bloomberg. Speechless …
According to the google translation of an article on Origo, the meeting was called by Simor, and not by VO.
However, I noticed that Mihaly Varga was present there as well. I wonder why?
Further look at the picture in the Origo article and then compare it to the one of Varga Mihaly’s website. They is no friendship between these guys.
http://www.origo.hu/uzletinegyed/hirek/20120106-megbeszeles-kezdodott-a-miniszterelnok-dolgozoszobajaban-simor-reszvetelevel.html
http://www.vargamihaly.hu/hirek/654_egyuttmukodes_a_kormany_es_a_jegybank_kozott

Ron
Guest
Member

Ron: Thanks for the pictures.
Look at the body language. THere is no love lost there for sure. I think at this point taking Orban’s word for anything is crazy. They should not listen what he says but what he does. SHouldn’t they?

Ron
Guest

Some1: I think at this point taking Orban’s word for anything is crazy. They should not listen what he says but what he does. SHouldn’t they?
In the old westerns the Indians said about the white man “he speaks with double tongue”. In VO case he speaks with double double tongue”.

Member

The IMF’s conditions have been “leaked” and are now up on portfolio.hu:
“According to the report, the IMF will set the following conditions:
– restoring the central bank’s independence;
– reinforcing the Fiscal Council;
– stricter fiscal policy, especially on the expenditure side;
– considerable reduction to crisis taxes and their eventual phasing out;
– putting a stop to implementing ad-hoc economic policy measures;
– seeing through the previously announced reform measures;
– overhaul of the system of social benefits;
– restructuring of public transport companies;
– introducing the institution of personal bankruptcy.”
The Dear Leader isn’t going to be *dictated* at like that is he?

Mutt Damon
Guest

No pony?

An
Guest

@Ron “According to the google translation of an article on Origo, the meeting was called by Simor, and not by VO.”
Also, rumor has it that Simor left the meeting early… he definitely left and OV alone informed the press. My hunch that the meeting hasn’t been that smooth.

An
Guest

Ron: http://www.portfolio.hu/en/economy/swift_deal_with_imf_is_hungarys_best_interest_orban.23580.html
“Responding to an earlier report today that Simor left the meeting prematurely (at around 09:30, before the press conference) Orbán said the meeting “ended in orderly fashion” and that it is the central bank’s competence how it communicates.
To an inquiry whether he feels responsible for the forint’s dramatic depreciation (to a new all-time low) versus the euro yesterday, he gave an evasive answer, saying the responsibility of Simor’s has not been raised. When asked for the third time he noted that his own responsibility did not come up either.”

Ron
Guest

An: Orbán said the meeting “ended in orderly fashion”.
Why would he say this? Looking at the picture of Mihaly Varga’s website Simor left in one piece. But nobody was helping him with putting his coat on and/or escorting him out.
I do not know if they shake hands when he left.

Eva S. Balogh
Guest

The European People’s Party no longer is supporting Orbán. They will be behind the decisions of the European Commission!!!

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