The fate of the Hungarian bank law: Total confusion

In the first Orbán administration (1998-2002) the youthful prime minister came up with the idea that holding regular radio and television interviews with select reporters was a good communication tool. Today he continues the practice by giving an interview every Friday morning on “180 Minutes” (Magyar Rádió).

Orbán and his communication crew might find these sessions useful, but more independent observers think that the prime minister’s appearances on Friday mornings create the impression of total chaos in the Hungarian government.

This week is a perfect example. On June 13 Economics Minister György Matolcsy announced that in order to begin negotiations with the International Monetary Fund the current law on the Hungarian National Bank must be modified. Mihály Varga, the man who is now in charge of negotiations with the IMF, said the same thing on the same day. He also indicated that consultations were still underway with the European Central Bank on the subject of who would have executive power over the central bank’s international reserves. Varga said that the Hungarian government will have to clarify such issues as how many members the Monetary Council should have and whether a third deputy chairman should be appointed.

Antal Rogán, the new leader of the Fidesz parliamentary delegation, went even farther when he told Népszabadság that the cabinet will probably withdraw the proposed amendment to the central bank law and submit a brand new one. Parliament could vote on the new bill next week or the week after.

The upshot: only a few days ago members of the cabinet and the leader of Fidesz MPs unanimously agreed on changing the law on the Hungarian National Bank in conformity with the wishes of the European Central Bank and the International Monetary Fund. Yet two days later the prime minister announced that “the government isn’t changing the law on the central bank.”

Here are a few relevant sentences from Viktor Orbán’s conversation. “We have a law that allows us to appoint a third deputy chairman [of the Hungarian National Bank] and therefore we will not change the law [on the HNB]. On the other hand, we are ready to promise that we will not appoint a new deputy during the tenure of the current chairman.”  This is straightforward.

So, although on June 3 Varga asked for a postponement of the final vote on the bill on the Hungarian National Bank in order to make the changes necessary to satisfy ECB and IMF demands, three weeks later the prime minister categorically declares that the Hungarian government has no intention of changing a word in the law.

And that’s not all. While a few days ago we heard from Mihály Varga that the government was consulting with ECB, yesterday we learned that these consultations are in no way binding. The ECB can only voice its opinions and might give advice but has no right to force the Hungarian government to do anything. “We will take their recommendations under advisement but we accept only those we find justified.” Furthermore, “the Hungarian National Bank is a part of the Hungarian financial system. No one can give orders to the Hungarian National Bank and that also means the European Central Bank.”

What is going on? Are we facing a situation in which the right hand doesn’t know what the left hand is doing? I think it unlikely. Is it a well coordinated game in which these three men are working on misleading the financial markets and keeping up the pretense of  immediate negotiations with the IMF? Possibly. And finally it may be that there are serious differences of opinion between Mihály Varga and Viktor Orbán over the necessity of an IMF loan and Hungary’s obligations in return. Perhaps. But, again, it is hard to imagine that Varga asked for a postponement of vote on the bank bill without Orbán’s OK.

Mixed Signals / Sanglucci

The mystery deepens if we consider that Mihály Varga only a couple of hours after the Orbán interview announced on MTV”s “Ma Reggel” that they are putting “the finishing touches on the new bank law.” So, after all, they are changing the law. But how much? It seems not much because the controversial appointment of a third deputy chairman of the bank would remain unchanged, just as Orbán in his interview indicated. But will the ECB and the IMF be satisfied with only a verbal assurance that while András Simor remains the chairman of the bank, that is, until next March, the Hungarian government won’t appoint another deputy chairman? Varga in the MTV interview indicated that the answer was yes. Or, more precisely Varga acted as if the ECB and the IMF never wanted more than a verbal promise to postpone the appointment of a third chairman. But this wasn’t the case. It was quite clear that the ECB and the IMF were worried about stuffing the Hungarian National Bank with government nominated people whose appointment depends on a parliament with a two-thirds Fidesz majority. Does that mean that these two financial organizations have softened their stance toward the intransigent Hungarian government? Did they give up the fight and are they now ready to support financially a government that in so many ways goes against the common Euro-Atlantic ideal of democracy? We don’t know because, I’m afraid, the words of the members of the Hungarian government cannot be trusted.

By now even the financial analysts are totally confused. Some think, like one of the analysts at Citibank in Budapest, that although the ECB might still be critical, the IMF will start negotiations with Hungary. An economist at Nomura specializing in the region is doubtful whether verbal assurances concerning the issue of a third deputy will satisfy the IMF. After all, their worry is about the long-term independence of the Hungarian National Bank. Analysts at Erste Bank are also skeptical. And finally, Timothy Ash, an economist at the Royal Bank of Scotland, still thinks that Hungary is playing the Turkish game–that is, they’re trying to fool the markets for a couple years about pending negotiations with the IMF that will never materialize but will keep the financial markets happy in the interim.

And one more thing. Viktor Orbán in the same Friday morning interview indicated that “in the next couple of years we will have to have serious discussions whether we want to join a fundamentally transformed eurozone.” When Hungary was admitted to the European Union it undertook the obligation to join the eurozone as soon as certain economic requirements were met. It now seems that Orbán on the pretext of a “fundamentally transformed” eurozone is thinking of not joining the currency union.  Although the eurozone has monumental problems at the moment, I for one think that both the European Union and the euro will survive and that in the long run it is to Hungary’s advantage to join the zone. But Orbán doesn’t want “a more perfect union” that would lead the European countries toward closer cooperation and would here and there infringe on individual sovereignty, an arrangement that is necessary for the survival of a financially healthy European Union.

I wonder how long Orbán will be able to play his games with the European Union. He may win a battle here and a battle there, but I think his war is doomed.

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Petofi1
Guest

“..trying to fool the markets for a couple of years…”

Really? And how much would that cost when the government now pays 8.5-9.0 % on government paper?

The Spaniards are said to be in desperate straits because they have to pay 6.5 %….So, where
then is Hungary? Any economists around who can tell us how much two years wil cost at this rate?

Guest

And Germany pays practically zero % …

Again, unbelievable!

NWO
Guest

No need to over analyze the situation. The are deeply and completely incompetent.

petofi
Guest

“No need to over analyze…”
Yes there is: we must discover the cost over two years and publicize it here and elsewhere.

LwiiH
Guest
@Wolfi, some of the German bond offerings came in @ a negative interest rate just because it’s considered a safe haven. The problem with the high bond rates will be felt for 3, 5, and 10 years to come. This is what OV’s ideology is costing the country. He’s pushing the problem down the road. The only hope is that the Hungarian economy can grow it’s way out of the problem. But that is a risk that OV won’t be paying for as he’ll be gone by then. So it’s easy for him to make this decision, not his money, not his risk, not his problem. This is why independence of the central bank is so important. They are suppose to be take a longer less political view actions but so far they’ve been stymied by politically appointed henchmen. These henchmen have effectively prevented the central bank from functioning as they should. You can feel the frustration when you listen to the likes of Júlia Király and András Simor. These people are sacrificing themselves staying as long as they can to frustrate OV’s efforts. If they had of resigned…. If you want to really know why the IMF deal isn’t… Read more »
Confused Paul
Guest

Sorry to go OT again, but I seem to have lost the ‘reply’ option on individual posts (the only option is ‘quote’). Éva – have you switched back to flat format? If not, can anyone explain how HS appears ‘flat’ to me? Is it this annoying logging in business again? If so, how do I log in – I can see no ‘login’ option.

Ta for any help.

Confused Paul
Guest

“He’s pushing the problem down the road.”

This is how he works. Got a problem? Change the law. Can’t change the law? Ignore it. Can’t ignore it? Take some short-term measure and leave the problem for future generations.

Interesting psychology – either he doesn’t think he’ll be around in n years time to have to deal with it, or he assumes he’ll come up with some other wizz when he does have to deal with it.

My vote would be he simply doesn’t think ahead at all. He’s an entirely tactical politician.

Guest

London Calling!

Thank you LwiiH – I always wait for your lucid and knowledgeable contributions.

I think most people know too that Orban can’t wait to get his hands on the reserves – and the IMF (and Simor) know it only too well too.

Regards

Charlie

Guest

London Calling!

Yes Paul she has.

I think you may have a loose nut on your keyboard?

Regards

Charlie

Guest

Paul, yes we are back on “flat”, you must have missed it.

OT: Just read a comment by Ulrich Schacht (a German protestant theologian, now living in Sweden)about the bad, bad aggressive ” post-national political media complex” aka the EU and its fight against Orbàn’s “christian national-liberal” government …

Other words used on the EU: laicist materialistic progressive left and pseudo-liberal …

So there are Germans also who want a return to the christain middle ages it seems.

This guy (born around 1950) was put into prison by the communist in East Germany -that might explain some things.

Guest

Confused Paul :
Sorry to go OT again, but I seem to have lt the ‘reply’ option on individual posts (the only option is ‘quote’). Is it this annoying logging in business again? If so, how MAY I log in ?
Ta for any help.

Wondering if I “quote” you if it my comment will appear directly underneath your query. It also is possible to alter the quote–I changed ‘do’ for ‘MAY’.

cheshire cat
Guest
Charlie, you say “I think most people know too that Orban can’t wait to get his hands on the reserves”. I guess the EU and ECB know that, too. That’s why they won’t start the IMF talks based on some verbal promise by Orban. I agree with those who think Orban is playing “the Turkish game”. He is hoping that if he waits long enough, he won’t need the IMF money backing the economy. The problem is, 8-9% interest rates are, as LwiiH explained, extremely costly for the country. I’m not an economist, but as far as I know that is only managable if the GDP growth is 8-9%, too. Hungary’s growth is predicted to be 1% the most at the moment. For every 100 euros of the debt that the country repays and refinances, there will be an extra 8-9 euros new debt piled on top of it. In other words we pay back 100 euros, and owe 109 instead. Crazy. I can only hope that Varga has more room to manouvre than we think, and he genuinely understands the need for an IMF deal. By the way, we mustn’t forget that the EC (Olli Rehn’s commission) haven’t actually… Read more »
Ovidiu
Guest
Paul
Guest

CharlieH :
London Calling!
Yes Paul she has.
I think you may have a loose nut on your keyboard?
Regards
Charlie

None on my keyboard, Charlie, but possibly one on the screen.

Paul
Guest

Ovidiu :
Hungary can fund itself without IMF – Orban
http://uk.reuters.com/article/2012/06/17/uk-hungary-imf-idUKBRE85G03S20120617

“He said Hungary’s finances could handle such high borrowing costs this year and next.”

Does he know something about 2014 that we don’t then?

Who will win the election, for instance…

Paul
Guest

Gretchen :

Confused Paul :
Sorry to go OT again, but I seem to have lt the ‘reply’ option on individual posts (the only option is ‘quote’). Is it this annoying logging in business again? If so, how MAY I log in ?
Ta for any help.

Wondering if I “quote” you if it my comment will appear directly underneath your query. It also is possible to alter the quote–I changed ‘do’ for ‘MAY’.

Unfortunately it doesn’t. Interesting that you can change the quote, though. Our trolls could have fun with that!

Paul
Guest

wolfi :
Paul, yes we are back on “flat”, you must have missed it.

Cheers, Wolfi. I did indeed miss it. I’m not on HS quite as often as I used to be.

On consideration, I think I prefer ‘flat’. The other way was more logical, but got a bit confusing.

Guest

London Calling!

Ha! Ha! Ha! Paul. I just wonder how long it took to come up with that counter-subtlety!

(Kirsten – If you need help with this example of bull-in-the china-shop subtlety I can help (if you care!). Thanks for the book recommendation btw – I’ll end up with quite a library!)

Regards

Charlie

LwiiH
Guest

SOT but very interesting if you’re looking for background information. This Munk debate are has been summarized on the CBC program Ideas into a 45 minute very very lively debate.

http://www.munkdebates.com/debates/Europe

Highly recommend having a listen.

Odin's Lost eye
Guest
Part of the core of the problem is firstly that the Hungarian Government feels that they must control EVEYTHING. But the position of the Governor of the Hungarian Central Bank is the problem as he is also a member of the Board of Governors of the ECB. When he is wearing his ECB hat he has to agree to decisions which may well adversely affect the decisions and requirements of the Hungarian Government. These decisions are made for the good of the ECB not just Hungary. This is the most potent reason for all of the row. There is no way that the other members of the ECB Gubernatorial Board can accept the decisions made in Budapest. Nor can they accept vague promises made by Budapest (even if they are made by the Viktator himself). The position of the Govenor of the Hungarian Central bank vis-a-vie the ECB has to be cast iron and copper bottomed! There is a secondary problem which is if the Hungarian Government got its sticky little fingers on the Hungarian gold and foreign currency reserves and used that 32 billion to speculate or monkey about in the currency exchanges just think of the chaos they… Read more »
Linguist
Guest
If I may to add something… I have no more steaks in this Hungary vs. EU struggle than the owner of this blog: we both live far away, therefore nothing affects directly our personal lives. Which means my bias is as good as hers. We both have nothing to lose 🙂 And just to spare you from a potential misunderstanding: I am not and never have been a Fidesz and/or Orbán supporter. Not likely that I’ll ever become one, even if personally I am inclined to be a conservative/traditionalist when it comes about political-social “taste”. Back to the Hungary vs. EU thing… There is one sentence in the blog post above that makes me wonder WHY certain aspects of this controversy were never questioned. Quote: changing the law on the Hungarian National Bank in conformity with the wishes of the European Central Bank and the International Monetary Fund. Before we debate it any further, I’d like to recommend an article from the New York Times, written by a Nobel laureate economist: http://www.nytimes.com/2012/05/23/opinion/the-crisis-of-european-democracy.html For those lazy to click on the link, let me give you just one sentence as food for thought: Perhaps the most troubling aspect of Europe’s current malaise… Read more »
gdfxx
Guest
To Linguist In my opinion the troubles of the EU countries are caused by the same reasons the US is in trouble. As they say in Hungarian: addig nyujtozz, amig a takarod er (don’t extend your legs beyond your blanket). Both the US (Federal but especially state) and the EU governments not only let the government sector (and the number of government employees) grow uncontrollably but they also provided them benefits that far exceed those available to private sector employees (the employers of the government and its employees). This applies especially to the pension benefits: in many states of the US a 20 year (or in many cases even shorter) employment history assures a government employee a pension equal to (or in some cases higher than) their salary, the best medical benefits etc. This led to financial commitments that are simply unsustainable. Austerity, the dirty word everyone in Europe hates, means that some of these benefits have to be cut back to sustainable levels. It does not matter that the economist who writes about this has a Nobel prize. That does not necessary makes him or her right. Financial dictates by the Germans, who are asked to support all these… Read more »
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