As talks intended to review Hungary's IMF/EU financial deal collapsed over lenders' demands for tough measures to keep the budget deficit on target, the Hungarian forint dropped to 288.98 against the euro yesterday (19 July), down from 286.82 HUF/€. EURACTIV Hungary reports.
Hungary is no longer able to draw credit from the IMF, since the overview procedure for the economy has failed.
However, Hungary does not need credit at this point, Dávid Németh, an analyst at ING Bank, told Hungarian weekly HVG.
The expert argued that Hungary is able to get financing through government bonds and treasury bills, adding that the country has foreign exchange reserves thanks to previous IMF and EU deposits.
The key issue now is what kind of communication the government will pursue and how it will act in the next few days, Németh added.
Viktor Orbán, Hungary's prime minister, refused to answer the question and told journalists to turn to the economy minister, György Matolcsy, as he is the one "competent" on the issue.
Orbán only met the delegations at a later stage of the negotiations (15 July), because he had been abroad.
This is the second such scandal since conservative party Fidesz won the April election by a landslide (EURACTIV 12/04/10). At the beginning of June the forint fell dramatically after a careless comment by the deputy leader of the ruling party, Lajos Kósa, who said Hungary was on the brink of bankruptcy, disturbing foreign investors.
Give them what they want!
The Hungarian Socialist Party (MSZP), the former ruling party which is now the largest opposition group in parliament, urged Prime Minister Orbán not to endanger Hungary's financial stability, and to do everything to stabilise the country's credibility and finances on the domestic and international arenas.
According to Attila Mesterházy, president of MSZP, if Orbán does not succeed in reassuring investors, serious consequences await Hungarian firms and citizens.
The Socialists also called for the negotiation agreements to be made public, to make clear what exactly caused the talks with the IMF and the EU to fail. They urged the government to immediately set a date for restarting the negotiations.
According to Jobbik, a far-right party represented in parliament, the foreign delegations' sudden withdrawal and their communications obviously serve the purpose of pressuring Hungary. Tamás Heged?s, Jobbik's deputy parliamentary leader, compared the events to a famous Hungarian novel, Pál utcai fiúk (The Paul Street Boys):
"We either give IMF and the EU what they want voluntarily, or they beat us up and try to force us to do it," he said.
IMF: No new credit
Christoph Rosenberg, leader of the IMF delegation, said after the suspension of the talks that there was no mention of possible new credit for Hungary, scheduled for 2011-2012. The IMF is also seeking more information on next year's budget. According to Rosenberg, the questions still pending mainly concern the sustainability of the planned budgetary measures.
Matthew Newman, spokesperson for the European Commission, said Brussels expected a 3.8% deficit this year and hope to see it reduced to less than 3% next year.
He said there was no agreement on when to re-launch the negotiations, but added that there would be "continued dialogue with the Hungarian authorities about the excessive deficit procedure and the EU 2020 goals".
Hungarian news agency MTI asked experts about the possible outcome of the suspension. They stated that the development was bad news for the market and could lead to a weakened forint and rising interest rates.
Bank tax and structural reform
One of the sticking points in the negotiations is a planned Hungarian bank tax (see EURACTIV 06/07/10).
Economy Minister Matolcsy said the government was insisting on introducing the bank tax, because it is the only alternative to drawing up additional austerity measures, similar to those that Hungary has already been implementing for the past 4-5 years. Such measures are not sustainable as they involve sacrificing growth and competition, the minister added.
"The negotiations with the IMF and the EU did not end, it is more right to talk about the unsuccessful closure of the negotiation round," he argued.
The IMF and the EU are against the planned bank tax. The IMF says it would hinder growth and lending, while the EU believes it could lead to a decrease in investment and economic growth.
Brussels noted that the Hungarian government "needs more time" to give details on the implementation of the structural reforms in the areas of public transport, health care, etc.
The EU executive expects a stable environment for investors and asked the government to "respect the independence of the central bank and its activites," experts said.
Six international banks operating in Hungary – KBC, Intesa Sanpaolo, Bayern LB, UniCredit, Raiffeisen International and Erste Bank – turned to the IMF earlier this month to object to the planned bank tax.
Matolcsy stressed that Hungary had started structural reform and would continue with it. "We starting operating in the political field first," he said, implying cuts to the number of representatives in the parliament (EURACTIV 12/05/10).
The Commission says "the legislation planned by the government can be judged as market distorting and […] could be against EU law".
But the economy minister appears to have a different opinion about the outcome of the negotiations, saying that the IMF and EU delegations appreciated the planned bank tax. He also said the EU negotiated more strictly than the IMF. "They are always stricter within the family," he quipped.
As the IMF is still trying to bridge its differences with Hungary, the Commission believes negotiations may be continued at a later date, observers said.
Q&A by Reuters:
Is Fidesz trying to buy time for local elections?
Fidesz won a parliamentary election in April on the promise of generating growth and jobs through tax cuts, which appears to have been its only economic policy plan.
Global markets have taken a sour turn, however, and the government was forced to abandon its budget loosening policy. It has done so half-heartedly, and the programme it was forced to put forward in June reflects a resentment toward austerity.
Fidesz hopes to maximise popular support for the local elections on 3 October. Before ousting the Socialists from power in April, the party had won voters by campaigning against a series of austerity measures by the left. Coming out with such measures of their own would risk alienating swathes of the electorate.
If they are to consolidate their power at the local level that will give Fidesz 3.5 years without an election, giving the government a freer hand.
Hungary's existing IMF/EU agreement will expire by October, giving Fidesz enough time to secure a safety net to fall back on. It remains to be seen whether the patience of markets will last another two months.
Is there a danger Fidesz will risk continued market sell off?
Yes, there is. Fidesz's popularity is rooted in a populist agenda that eschews austerity. To execute its agenda - supporting families and small businesses at the expense of taxing banks and multinational firms - Fidesz needs to control local governments.
The breaking point will likely come soon after the local elections, which will coincide with writing next year's budget and the expiry of the current IMF/EU aid deal. If Fidesz does win local elections with a strong mandate, it can relax the populist agenda.
What is Fidesz’s economic philosophy?
The party has proposed legislation to lower the tax burden on households and companies and wants the financial sector - mainly banks with West European parents - to foot the bill.
The decision to put the pro-growth Matolcsy in charge of the economy reflects the idea that deficits can be reduced not just by spending cuts but also by measures that boost growth potential.
The clash over the deficit between the government and lenders masks a deeper philosophical divide between the expansionary and restrictive schools of economics at a time when most EU governments are forced to tighten their belts.
Fidesz, which wants to distance itself from the leftist governments of the past eight years, loathes the idea of austerity for fear of being branded the same as the Socialists.
Its efforts to meet the 3.8% of GDP budget deficit goal centre on a financial sector tax. Fidesz's reluctance to introduce harsher spending cuts and its insistence on the bank tax have strengthened its populist image among investors.
Other measures, most notably planned pay cuts at the central bank, further enhance this image.
Who makes the decisions in Fidesz?
Prime Minister Viktor Orbán, 47, is the ultimate decision-maker in both the Fidesz party and the government.
Orbán is the strategist when it comes to politics, while in economic matters he is said to be listening mostly to Matolcsy, who has a pro-growth vision of policy which differs from that of fiscally-focused former Socialist Prime Minister Gordon Bajnai.
Orban is advised by experts including ex-central banker György Szapary and former Finance Minister Mihály Varga, but it is Orbán who puts the final seal of approval on all major decisions. He has a tight grip over his party and the cabinet.
Getting back into power with an unprecedented over two-thirds majority in parliament in April was his biggest victory and gratification for elections lost in 2002 and 2006. Orbán plans for the long term and has envisaged that the next 15-20 years of Hungarian politics will be defined by "one central political force" - his Fidesz party.
Crisis-hit Hungary was the first EU country to benefit from a European facility worth up to €12 billion to address the financial turmoil. The EU's support for Hungary comes in conjunction with a wider €12.5 billion rescue plan agreed with the International Monetary Fund (IMF) to help restore the country's economic stability (see EURACTIV 29/11/08).
Last April, Hungarians voted massively for a radical change of the country's political landscape, sending the ruling socialists into opposition and paving the way for the centre-right to win an absolute majority in parliament (EURACTIV 12/04/10).
The result marked the biggest victory for any political party at a general election since the fall of communism twenty years ago. However, several measures put in place by the new government have since fuelled controversy (see EURACTIV 25/06/10, EURACTIV 11/06/10, EURACTIV 25/06/10).
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