New obstacles to negotiations with the IMF?

After studying the reports of the last few days on the impending IMF negotiations, I’m coming to the conclusion that the situation is not so simple as Mihály Varga, the man in charge of the negotiations, tried to convey. Varga claimed yesterday that the start of the negotiations depends only on “synchronizing the dates and plane schedules” among the negotiating partners. This announcement followed the receipt of the European Central Bank’s reactions to the amended law on the Hungarian National Bank that, according to Varga, gave the green light to the negotiations.

Varga had to admit, however, that during the course of the negotiations the European Central Bank may come up with further demands. Even without any additional demands the negotiations will not be easy. According to analysts in Budapest and London it may take many months to hammer out the differences in the negotiating partners’ positions.

One can start with the kind of  loan Hungary will get. Hungary would like to receive something called a “flexible credit line” (FCL), which is the financial safety net Viktor Orbán has been talking about. The problem is that according to the IMF “the FCL  was designed to meet the increased demand for crisis prevention and crisis-mitigation lending from countries with robust policy frameworks and very strong track records in economic performance.” Hungary does not have a very strong track record in economic performance. Instead of an FCL  most likely Hungary will be eligible for something called a “stand-by-arrangement”  (SBA) that is designed for countries in need of financial assistance, normally arising from a financial crisis. In return for aid, the economic program stipulates needed reforms in the recipient country aimed at bringing it back on a path of financial stability and economic sustainability. Well, this is exactly what Viktor Orbán would like to avoid.

Varga admitted that  Hungary might have to fulfill certain demands if the country is eligible only for an SBA loan. He specifically mentioned the issues of public transportation, financial assistance to local government, and certain issues concerning taxation. Especially problematic might be the bank levies, and by now we can add the transaction taxes, especially on the Hungarian National Bank and the treasury. As far as the flat tax is concerned, the Hungarians were not officially informed about the IMF’s position on the issue, but Varga said that “we do read the statements of the leaders of the IMF.” He admitted that they don’t know precisely what is awaiting them in the negotiations: “we are groping in the dark.” Varga is hoping that all will become clear once they sit down to negotiate. He is counting on impressing the IMF negotiators with the new healthcare bill, the new law on local governments, other administrative steps taken to reduce costs, and the promise that in 2014 the bank levy will come to an end.

Although Varga admitted to the reporter of Magyar Nemzet that the European Central Bank may come up with further demands, he added that, although the letter of the ECB is important, “the key actor of the negotiations is the IMF and therefore if no response is forthcoming before the last day of the parliamentary session” the Hungarian parliament will vote on the amendments to the law on the Hungarian National Bank without final approval by the ECB.

What do the London analysts have to say (not that I have great trust in their analyses in general)? According to Barclays Capital, because the loan will be the SBA type the economic program will have to be comprehensive and complicated. And that takes time. The same analysts wouldn’t be surprised if the negotiations lasted as long as the preparation for the start of the negotiations, seven months. Morgan Stanley is concerned about the transaction taxes, especially since the Hungarian Bank Association had very strong objections to them. It is most likely, claim the Morgan Stanley analysts, that the IMF will sympathize with the banks.

MSZP being an opposition party is taking the position that an agreement with the IMF is “in danger.” According to László Botka, the chairman of the party’s steering committee, the IMF and the European Central Bank will not accept “the extension of the transaction tax to the national bank.” The party’s financial experts are convinced that the budget under discussion in the house is specious and it is unlikely that the IMF will accept it as a valid prognosis of the Hungarian economy’s future. Tamás Katona, formerly undersecretary in the ministry of finance in the earlier administration, is certain that the decision to extend the transaction tax to the national bank and the treasury is designed to further postpone negotiations with the IMF.

And finally, Népszava seems to know the details of the letter of the European Central Bank concerning the amended bill on the Hungarian National Bank. If their information is correct, the ECB still has many reservations that it expects to be remedied. Apparently the “bureaucrats” in Frankfurt want further assurances on the issue of a third deputy-chairman and the appointment of new members of the Monetary Council. They still insist on a full salary for the chairman and his deputies, and they still want them to take an oath to the central bank and not to the Hungarian government.

This news has not been confirmed by others, but I got the impression that Népszava saw the document and that the report is based on the text. If that is the case, Varga’s fear that the ECB may come up with new demands wasn’t unfounded. At the moment one cannot say whether or not the negotiations will start soon in spite of the latest stunt of the Orbán government. In any case, Varga’s optimism seems premature.

By the way, if no change occurs in 2013 40% of the Hungarian GDP will be spent on taxes. This is highest since 1990. By comparison, in the United States the percentage of taxation on all levels is only 26.9% of the GDP. If we compare Hungary to the other former socialist countries, all countries with the exception of Slovenia have a lower rate. It is true that there are some European countries where the rates are higher: Sweden, Belgium, Iceland, Austria, and Germany. However, these countries provide more extensive social services to their citizens than does Hungary where the Orbán government spends very little on education and healthcare.

And lest I forget, Zimbabwe (as in so many other things financial) holds the record for the highest rate of taxation. It is 49.3% of the country’s GDP. Not exactly something to strive for.

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Respect Beauty
Guest

According to http://www.taxrates.cc

Zimbabwe Income Tax Rate – 35%
Zimbabwe Corporate Tax Rate – 25%
Zimbabwe Sales Tax / VAT Rate – 15%

Hungary Income Tax Rate – 332%
Hungary Corporate Tax Rate – 19%
Hungary Sales Tax / VAT Rate – 25%

In 2010 (the last available statistics on http://www.indexmundi.com/g/g.aspx?v=66&c=hu&l=en ) Zimbabwe had economic growth of 9% versus 1.2% for Hungary.

There is some discussion on Zimbabwe blogs about the extent of foreign control of the banks. See
http://www.newzimbabwe.com/news-8374-Indigenisation+banks+given+July+deadline/news.aspx

Odin's Lost eye
Guest

Reapect Beauty Income Tax in Hungary at 332% thiss means that every one is taxes at 3.2 times his total earnings!
VAT (AFA) rate is now 27%

Respect Beauty
Guest

Odin’s Lost eye :
Reapect Beauty Income Tax in Hungary at 332% thiss means that every one is taxes at 3.2 times his total earnings!
VAT (AFA) rate is now 27%

Ooops! Sorry for the typo. The website says that Hungary has an income tax rate of 32% (Thirty-two percent), not 332%.

Guest

Respect and Odin: I have thought that the income tax rate in Hungary was the (unwise) flat tax of 16%. Is this the older system, predating the flat tax?

Ron
Guest

Gretchen :
Respect and Odin: I have thought that the income tax rate in Hungary was the (unwise) flat tax of 16%. Is this the older system, predating the flat tax?

Gretchen we are talking about two things here, and this is very confusing. You are right the the Income Tax is 16%, although over a certain amount the rate of 20.2% is applicable. All tax credit are abolished.

The forty percent is the taxable amounts paid to the various institutions, and compared to the GDP. This include all taxes.

What is not included in the 40% are the social security and pension premiums, which would add, according to me, easily another 20%.

Paul
Guest

“However, these countries provide more extensive social services to their citizens than does Hungary where the Orbán government spends very little on education and healthcare.”

So, if he’s not spending it on healthcare and education, and he can hrdly be spending a lot on Hungary’s military, what is he spending it on?

Paul
Guest

OT, but relevant to several recent posts – there was a very good opinion piece on R4 this morning, which I have just found on the BBC web site – http://www.bbc.co.uk/news/magazine-18645370

It’s by Adam Gopnik and is well worth a read. Don’t be put off by the title, which only really refers to the beginning of the article. It’s actually a very concise and convincing argument against racism and nationalism (and our role in not just standing by and letting it happen).

As he says towards the end of his piece: “But when we see the three serpents of militarism, nationalism and hatred of difference we should never be afraid to call them out, loudly, by name, and remind ourselves and other people, even more loudly still, of exactly what they have made happen in the past.”

Guest

The latest news:
“We find it impossible to accept some of the Commission’s recommendations; heavier taxation of consumption as opposed to hiking the tax burden on income is non-negotiable from the point of view of the Hungarian government,” Prime Minister Viktor Orbán said in a press conference following the EU summit on Friday, news portal Index reported.

http://www.portfolio.hu/en/economy/pm_orban_hungary_rejects_ec_recommendations.24470.html

What does this mean ? I’m a bit confused – maybe it’s just the heat: 37 Celsius (99 Fahrenheit) right now near the Balaton …

petofi
Guest

Paul :
“However, these countries provide more extensive social services to their citizens than does Hungary where the Orbán government spends very little on education and healthcare.”
So, if he’s not spending it on healthcare and education, and he can hrdly be spending a lot on Hungary’s military, what is he spending it on?

Answer: the family estate near Felcsut…and, the Felcsut stadium…and…well, there are deposits to be made at various off-shore accounts…ahem

cheshire cat
Guest

Wolfi

“We find it impossible to accept some of the Commission’s recommendations; heavier taxation of consumption as opposed to hiking the tax burden on income is non-negotiable from the point of view of the Hungarian government,”

he means that he wants to increase VAT (AFA) and to introduce other taxes you pay when you buy something (telephone call tax, unhealthy food tax etc) instead of increasing or changing the flat income tax.

The EC are not happy with the flat tax, because the better-off have been saving the money, rather than spending or investing it. While the people with lower incomes, who HAVE TO spend all their money on housing, food etc have had less to spend – so altogether consumption has shrunk and economic growth has slowed down. This was one of the issues in their “country-specific recommendation” for Hungary and Orban is sayings he is going to ignore it.

Guest

@Cheshire Cat:

I know what Orbán’s doing and wrote about it on realdeal.hu – but I’m wondering about the consequences for Fidesz. These austerity politics: high inflation plus taxes for the less well-off (actually poor if you consider it) will not go well with the voters – so who is going to get the blame ? Does Fidesz think that people will still blame MSZP, the EU, the IMF, the Zionists, Israel or whoever for their financial problems ?

cheshire cat
Guest

“Does Fidesz think that people will still blame MSZP, the EU, the IMF, the Zionists, Israel or whoever for their financial problems ?”
Oh yes, all those. 😀
Some Hungarians still think that Orban is doing a great job, it’s just as good as it gets with the tremendous sovereign debt etc.

To answer your question – I’m guessing, but he probably thinks people are still happier with banks, telephone companies, foreign supermarket chains paying extra money rather than real austerity and expenditure cuts for everyone. Of course the economy will come to a halt with this madness very soon, but as you say, he can always blame the EU for it.

I’ve had a look at your comment at realdeal, good point there too!

Orban talks complete incoherent nonsense: one minute we have won and the whole EU is introducing his mega-succesful economic measures, we are strong enough to get up from the ground unsupported and we don’t need the German taxpayers’ money – next minute when he is begging for cohesion funds, poor Hungary is still much less developed than the EU average and the EU (!) will die of a heart attack if they don’t give money to Hungary.

??

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