While Romania is leading the way in getting the lowest rates on numerous IMF loans, further plunging the country into debt, Hungary’s financial ministers are having a dialogue on what went wrong before PM Orban came to power in 2010, and why can’t he get a loan with such a low interst rate as Romania? Below is a letter from the ex-Financial Minister of Hungary Peter Oszko to the Financial Times.
More bad news from the IMF:
January 25, 2012 4:41 pm by Stefan Wagstyl
Hungary could get by without a financial rescue as long as things get no worse in the eurozone. But if there is a new eurozone shock, Budapest would struggle to meet its external financial obligations.
That’s the view of the International Monetary Fund, published on Wednesday, as prime minister Viktor Orbán redoubles efforts to persuade the Fund and the European Union to help him out. While it’s hardly a congratulatory report, it bears out Budapest’s opinion that while the country could survive unaided, it’s safer not to take the chance.
The IMF’s forecast is surprisingly positive in the light of the general gloom about central Europe in general and Hungary in particular. In contrast to the EBRD, which earlier this week forecast a 1.5 per cent GDP contraction in 2012, the Fund predicts growth in its baseline scenario, although only of 0.3 per cent growth.
The Fund’s staff report argues that as long as the eurozone stabilises, Hungary should pull through:
In this environment, large external financing needs can still be met, but at a higher cost and shorter maturity as non-resident investors’ risk aversion rises and parent banks continue to deleverage. Public debt remains broadly sustainable and begins to fall as growth normalizes and announced medium-term fiscal consolidation takes hold.
But, if there’s a new eurozone crisis, all bets are off:
By contrast, in the adverse scenario, a worsening of the Eurozone crisis triggers a recession and the emergence of an external financing gap. The contraction – which would primarily stem from a sharp fall in export growth – would likely be less severe than in 2009 given already weak domestic demand.
Nor can commercial banks be relied upon to step into the breach:
Unlike in the previous crisis, parent banks may be less likely to
significantly increase their funding to subsidiaries given the policy environment in Hungary and pressures in the eurozone.
As the report says, the Hungarian authorities agree with this scenario – but see the chances of the adverse scenario materialising “in its entirety” as “low”.
Here are the key numbers in the forecast. Remember this is for the benign-ish baseline outlook:
All this confirms what was already know – that Hungary’s problems with the IMF and EU aren’t primarily with its short-term economic performance (although this causes concern) but with its structural policies. That is the many changes Orban has implemented that have annoyed investors, both foreign and local – including attacks on central bank independence, the nationalisation of private pension funds, and special corporate tax levies.
As the IMF board puts its delicately in its statement:
Executive Directors noted that the rebound from the crisis has been modest and vulnerabilities remain high. Furthermore, concerns about domestic policies and rising global risk aversion are weighing on sentiments in financial markets. Directors therefore underscored the need for a well-crafted policy mix that restores confidence in economic governance, anchors the ongoing adjustment, and strengthens economic institutions.
Orbán, who has promised to be seek conciliation, seems to have swallowed this argument, however reluctantly. But the vague promises made so far, fall short of a workable IMF/EU agreement.
B. Go here:
Guest post: Orbán’s hazy memory of debts, cuts and economic policy
January 23, 2012 2:58 pm by beyondbrics
By Péter Oszkó, former finance minister of Hungary
Viktor Orbán, Hungary’s prime minister, appeared unusually flexible and conciliatory in the European Parliament last week.
But, true to form, he still came up with some well-worn excuses for his government’s performance since taking office. His opponents exposed a few, but missed others – a number of which are demonstrably false.
For a start, Orbán still claims in public that his government has been able to decrease the state debt.
In fact, public debt totals increased to reach a historical peak at the end of 2011 – this despite the nationalisation of private pension funds worth some €9bn – or 9 per cent of GDP.
More importantly, Viktor Orbán continued to argue in the European Parliament – without any objections – that his rushed and unorthodox economic policies were the result of inheriting a country close to bankruptcy.
This is a denial of the facts. When Orbán started his term in the summer of 2010, Hungary’s state debt stood at around 80 per cent of GDP, a tad lower than the EU average. Furthermore, the budget deficit for the year was forecast at between 3 to for 4 per cent of GDP, a figure that many European member states envied.
This was despite the fact that in 2008, when the global crisis hit Europe, and as the level of public debt and structural balances were deteriorating rapidly, Hungary was the first country to request IMF help.
Yet while many other EU states then turned to economic stimulus packages, allowing indebtedness to increase, Hungary applied the brakes and stole a march on others.
In 2009-10, by implementing expenditure cuts in areas such as public salaries, the pension system, family and housing allowances and energy subsidies, Hungary achieved a 4 percentage point structural cut in the state budget.
(Orbán himself implicitly admitted this – even trying to take credit for the success – boasting several times in the summer of 2010 that Hungary had proved itself to be a world champion in expenditure cuts.)
While undergoing these cuts, Hungary also improved its competitiveness through a revenue-neutral tax restructuring and a reduction of the tax wedge. As a result, total labour costs significantly decreased, and after a recession of 6.3 per cent in 2009, at the beginning of 2010 the country had returned to a stable growth path.
Orbán then promptly won the election by promising both an end to austerity and significant tax cuts.
But to effect this programme, he pretended (and continues to pretend) that the previous government had left behind a much worse budget than in reality, so that he should be allowed to expand the budget deficit in 2010 to around 6 per cent of GDP.
Unfortunately for the new prime minister, due to the ongoing IMF programme, experts from Brussels and Washington were closely monitoring Hungary’s state finances: and they both immediately disproved and rejected Orbán’s arguments.
The result? Orbán declared a war of independence against the IMF. He stopped all negotiations, and while accepting the lower deficit targets under the EU’s excess deficit procedure, he still implemented the flat tax programme – costing more than 2 per cent of the GDP – plus various other measures, all of which worsened the structural deficit.
To plug the gap, formal deficit targets in both 2010 and 2011 were met by the violent nationalisation of households’ savings in private pension funds, plus various supplementary taxes applied retroactively on the banking sector and multinational companies.
These measures certainly helped reach short-term budgetary targets, but they shocked the financial and business worlds, undermining confidence and damaging the growth potential of the country; as a result, Hungary again faces recession in 2012.
The financial markets are still scratching their heads in wonder at the arguments of the Orbán government. How could it be that if in 2010 they had inherited a country close to bankruptcy, the answer was immediate tax cuts both in corporate and in personal income tax, while expenditure cuts had to be postponed?
Further, while the one-off measures meant that the deficit targets were formally met, the structural deficit in 2011 climbed to 6 percent and, according to central bank data, state debt had hit a historical peak of 82.4 per cent by the end of the year.
All this has combined to destroy potential growth, ruin the credibility of the government and country, and very negatively impacted on the the country’s credit ratings, currency, CDS pricing and government bond yields.
Consequently, even though the domestic political communication of the government was widely based on Hungarian sovereignty and a “war of independence” against the outside world – a world symbolised by banks, multinationals and a bullying IMF – at the end of 2011, there remained no other choice than to retrace steps to Brussels and Washington.
Today, besides its economic failure, the governing party also faces the loss of more than half its voters, while the popularity of Viktor Orbán and Fidesz has dipped to historical lows – according to the latest opinion polls, more than 80 percent of voters are are dissatisfied with the government.
To boost confidence and exhibit power to the outside world, Orbán’s core supporters organised a mass demonstration last weekend.
Perhaps 100,000 people (the organisers claim four times that number) were bused into Budapest from across the country (and even from ethnic Magyar communities in neighbouring states) to support the government and and its claimed purpose of protection our nation’s sovereignity.
Sadly they, like many in the European Parliament, have yet to recognise that the defencelessness and vulnerability of the country have nothing to do with what the current government inherited. Rather, it is the inevitable consequence of Orbán’s economic policy.
Péter Oszkó was Hungary’s finance minster from April 2009 to May 2010.
________You be the judge!
People have the right to know what the leaaders are up to, as in both countries there is -upheaval, many demonstrations, against taking on further debt from the IMF.
Shopping at Marimekko, a quirky, off-the-wall store in Finland.