Just to remind you. It was almost seven months ago that after a speedy reversal the Hungarian government announced its intention to begin negotiations with the IMF for a loan after all. Since then basically nothing has happened because Hungary has been unwilling to fulfill the requirements set forth by the European Commission. Brussels has a lot of gripes and several infringement proceedings were launched against the Hungarian government, but the real sticking point is the new law on the status of the Hungarian National Bank.
Budapest made a few changes to the law, but last Thursday the European Central Bank announced that “the provisions of the current Hungarian National Bank Law do not go far enough to re-establish the central bank’s independence.” Economics minister György Matolcsy was not moved. He submitted the criticized bill in unchanged form to parliament. The final vote on the bill was scheduled for Monday, June 4, 2012. A change in the law would also require a change in the newly approved constitution, the Basic Laws.
What are the points on which Hungary refuses to budge? First, the Orbán government insists on its right to expand the size of the Monetary Council. The Monetary Council is comprised of outside financial experts as well as the governor and deputy governors of the Bank. The Fidesz government already added a few new members to the Council sympathetic to the current government and obviously is planning to change the composition of the Council in the future if its perceived interests so dictate.
The Orbán government proposed the appointment of a third deputy governor, and this appointment seems to be so important in their eyes that they refused to abandon the idea. With a two-thirds majority the person of this future third deputy-governor would be someone whose independence from the government would most likely be questionable.
Third, there remains the question of the competence of the Monetary Council which currently is the decision-making body on interest rates. The Orbán government wants to expand its competence to include decisions over the Bank’s strategic reserves. Given the rumors about the government’s plans to dip into the Bank’s reserves, it is clear why the European Commission and the European Central Bank oppose this point.
The pay of the governor and deputy governors and whether they swear allegiance to the Hungarian Constitution are minor irritants that remain, but Brussels may not insist on changing these sections of the law.
At this point it may be useful to introduce or reintroduce some of the characters involved here. First, there is our old friend Tamás Fellegi, who was Viktor Orbán’s professor and senior advisor. Fellegi, after getting a Ph.D. in political science at the University of Connecticut, returned to Hungary where he became a fairly wealthy businessman. In May 2010 he was named minister of national development and spent most of his time building economic bridges to China and Russia. His only notable achievement, if you can call it that, was the purchase of a sizable stake in MOL which turned out to be a questionable investment from the Hungarian government’s point of view.
Whether on his own volition or not, Fellegi asked to be relieved of his duties and was appointed minister without portfolio in charge of the impending IMF negotiations. Given the Hungarian government’s inflexibility on the vital issues of the Bank Law Fellegi got nowhere, and on May 11 he decided to resign and abandon politics altogether. Fellegi’s resignation didn’t come as a surprise to Viktor Orbán; a day later he nominated Mihály Varga as Fellegi’s successor at the negotiating table with the IMF.
We haven’t talked much about Mihály Varga although he is an important person both in Fidesz and in the first and second Orbán governments. He joined Fidesz in 1988 and was high enough up on the Fidesz list to become a member of parliament already in 1990. He has been there ever since. For two years (2000-2002) he served as minister of finance, and throughout the eight years that Fidesz was in opposition Varga was the financial expert of the party. Everybody expected that Varga would again be the minister of finance in the second Orbán government. It didn’t work out that way. Although the new government created two ministers dealing with economics, neither of the posts went to Varga. Instead, he was named undersecretary within the Prime Minister’s Office. His role was to maintain contact between the Prime Minister and the members of the government. The appointment was viewed as a demotion, prompted by a remark Varga made before the elections that Viktor Orbán considered injurious to the party’s interests.
The parliamentary committee dealing with economic matters easily approved Varga’s nomination and on May 22 the full parliament gave its blessing. Since then Varga has stressed the “very substantial savings and benefits” that Hungary could derive from a speedy agreement with the IMF. He even added that Hungary would need enough credit “to safely finance two or three years.” So, Varga and Orbán don’t see eye to eye. According to Orbán Hungary doesn’t need the IMF money at all; if there’s no agreement Hungary can finance itself indefinitely. A few days later Varga even mentioned the exact figure Hungary would need: 15 billion euros. But when it came to a date for beginning the negotiations he was vague. He indicated that it would most likely be after June 22 when Ecofin makes its final decision on Hungary’s cohesion funds.
After the Thursday announcement that the European Central Bank doesn’t consider the Hungarian amendments to the Bank Law satisfactory, the Hungarian forint began to fall rather precipitously and the Hungarian media began talking about “the storm that is awaiting Hungary on Monday,” meaning the day parliament will pass the the Bank Bill that will most likely be unacceptable to both the European Commission and the IMF. The markets had been expecting speedy negotiations after June 4 but with the bill as it stands now there will be great disappointment with serious financial consequences. The likelihood of the forint falling further was anticipated.
It was at this point that yesterday afternoon MTI issued the breaking news that Mihály Varga had asked Antal Rogán, the new leader of the Fidesz caucus in parliament, to postpone the final vote on the bill. Knowing the way Fidesz and the Orbán government work, Varga first had to have convinced Viktor Orbán, the sole “decider,” that if the bill goes through, Hungary will be in big trouble. The rest is only theatrical performance. Varga is asking Rogán to consider postponement? Rogán is claiming that he thinks he can convince the majority of the caucus? Ridiculous but a necessary exercise to keep up the appearance of democracy in Hungary. Tomorrow, the Fidesz caucus will vote to postpone the final vote. It will be done. No question.
What does this mean? Does it mean that Hungary will change the law according to the wishes of Brussels? In my opinion it doesn’t. I think that another round of negotiations is in the offing. Rogán today elaborated on the plan: “The Hungarian government considers it necessary to postpone the vote in order to give an opportunity for an agreement between the IMF and the government on the still open and disputed questions. Of course, if such an agreement comes into being between the government and the IMF, we are ready to include these points of view in the bill.”
Will that appease the markets tomorrow? Perhaps. In the past we saw how easily the Orbán government managed to manipulate the international markets with its repeated promises of speedy negotiations and its flexible attitude. It worked in the past six months and perhaps it will work again. For a while. But what about months of further negotiations on some fine points after which the Hungarian government puts together a new bill that is still unsatisfactory? I think the likelihood of such an outcome is high.