Month: February 2008

All those streams of natural gas

Well, I think I have more or less managed to sort out the "streams"–that is, the pipelines by which Gazprom provides Europe with natural gas. The first Russian pipeline, built quite a few years ago, was the Friendship Pipeline. That line went through Kursk, continued through Ukraine just south of Kiev, and reached Uzhgorod at the Ukrainian-Slovak border. After going through Slovakia it reached Vienna and points farther west. Hungary received its gas from this main pipeline via a branch line from the Slovak-Ukrainian-Hungarian border. The Friendship pipeline delivers about 160-180 billion m³ gas to Europe. Another existing pipeline goes through the Baltic states and Belarus to Poland and from there on to Berlin and beyond. That pipeline delivers about 50 billion m³ of natural gas–obviously not enough for Northern Europe. So a new pipeline is planned called the Northern Stream which will reach Germany directly from Russia under the Baltic Sea with a capacity of 60 billion m³. A relatively new pipeline is the Blue Stream which has already reached Turkey under the Black Sea. The Southern Stream will begin at Tuapse in Southern Russia, will also cross the Black Sea, this time going to Bulgaria. From Bulgaria one branch will go northward to Romania, Hungary, and Austria while the other will continue through Greece to southern Italy under the narrow passage under the Strait of Otranto (Adriatic Sea). This pipeline will be able to deliver 30 billion m³ of natural gas. However, all these billions of cubic meters are still not enough to supply Europe: an additional 40-50 m³ are needed.

All the pipelines described above originate in Russia, leaving Europe at the mercy of Russia’s possible economic and political pressure. Therefore a number of European oil-gas companies (including the Hungarian MOL) got together to promote a new pipeline called Nabucco that would bypass Russia and would bring natural gas to Europe from Middle Eastern and Central Asian countries: Iran, Azerbaijan, Kazakhstan, Turkmenistan, and Syria. This pipeline would reach Turkey from Azerbaijan through the Caspian Sea and from Turkey it would go through Bulgaria, Romania, Hungary, Austria to northern Italy. The European Union and the United States, for obvious reasons, prefer this solution. However, the problem with the Nabucco project is that neither the financing nor the availability of natural gas is secured at the moment.

A few months ago the Hungarian government got into some trouble with the European Union and the United States by appearing to prefer the Blue/Southern Stream over Nabucco. Although MOL has been negotiating with Gazprom concerning the the Southern Stream, Hungary was the last country to sign a contract. All the other countries, including Italy and Austria, had made agreements with the Russians. Hungary was the last link. So yesterday the agreement was signed in Moscow. Mind you, there was about a two-hour delay because in the last moment Putin came up with a surprise demand: the Hungarian government should guarantee the whole project financially. Gyurcsány refused, and it seems that he won. According to the agreement a joint company was formed with equal Russian and Hungarian participation that would be responsible for building the Hungarian section of the pipeline. In addition, this company will construct storage facilities.

Meanwhile Gyurcsány and the experts claim that Hungary is still supporting the Nabucco project which is also supposed to go through the territory of Hungary because they feel that it would be better to rely on two sources than on one. The opposition of course is not happy: Orbán claims that the Hungarian government committed a coup d’état against the Hungarian people by not consulting with them concerning the construction of this pipeline.


The “New Ownership Program”

Slowly more and more information about the "New Ownership Program" (in Hungarian: Új Tulajdonos Program [ÚTP]) is coming to light, though the full public discussion will take place only in March and April. First of all, the estimated value of all the state-owned entrepreneurial companies is about 1,500-2,000 billion forints.  Among them, of course, are real duds, such as MÁV. However, there are a few highly profitable companies: Magyar Villamos Művek (Hungarian Electric Works), Szerencsejáték (Hungarian Lotto), Állami Autópálya-kezelő (responsible for toll roads), and even Magyar Posta (Hungarian Postal Service). These companies are called "Zrt" which indicates that they are corporations in the sense of having shares, but right now the state is the sole shareholder. These "Zrt’s" would be made "open" in the sense that 49% of their shares would be in private hands. They would be freely traded on the stock exchange. A small percentage of this 49% would be available under the New Ownership Program.

As the plan now stands, a family would be able to purchase up to 1 million forints worth of stocks. They would have to make a down payment of 5% and could pay the rest over time. Ferenc Gyurcsány optimistically announced that in four years this 1 million forint initial purchase might be worth 5 million forints, in five years 10 million forints, and in eight years 20 million. From these numbers I gather that at the moment the government is thinking in terms of restricting the sale of purchased shares for at least four to eight years. All Hungarian citizens over eighteen would be eligible to buy stock in addition to citizens of other countries within the European Union who live in Hungary on a more or less permanent basis.

According to some estimates about 44% of the population has some savings: mostly in cash and in bank deposits with fairly low yields. The interest in ÚTP seems to be high. According to one of the polling companies, 2 million people are thinking of participating. As for reactions of the experts? Not surprisingly the management and brokers of the stock exchange are enthusiastic. Some people (for example, Éva Pálócz, head of Kopint-Tárki Zrt, an economic think-tank) worry that once the prohibition of the sales of shares is over, speculators will get hold of these stocks. These people bring up as an example the very badly executed program of "stocks" people received as compensation for lost property. Indeed, this was a nightmare as I know from my own experience. The hope is that there will be better safeguards this time. Surely, they must have learned something from that fiasco. Levente Blahó of Raiffeisen Bank is enthusiastic. He hopes though that a very large percentage of these stocks will freely circulate during the prohibition period because otherwise the prices of the stocks may be adversely affected.

For what my two cents is worth, let me compare this to what normally happens in an initial public offering (IPO) in the U.S. In an IPO a relatively small number of shares is offered to the public (Google, for instance, offered only 7%) with the rest retained by company founders, venture capitalists, and management. The "public" is rarely the little guy; normally before the stock starts trading on an exchange, investment banks and their best clients own the shares. Then the rest of the universe can weigh in. Do we believe in a company such as MasterCard or do we think it’s a loser like Vonage? The stock trades freely, sometimes wildly. In the meantime those who hold stock not offered to the public normally respect a lock-up period (usually a few months) and don’t try to sell their shares into the market. That would, of course, put pressure on the share price. But the stock that came public has changed hands countless times. This is the process of price discovery–what do people think the stock is really worth?

Under the Hungarian proposal it would seem that Hungarian citizens, assuming that they receive shares before stocks begin trading publicly, will be like American investment banks and their best clients (with huge leverage!) except for having a lengthy lock-up period. The balance of the 49% will trade freely on the BUX (akin to action after an IPO starts to trade on an exchange). So who wins? Well, if the stock goes up, everybody, including the government who is sitting on 51% of the company.

The closest thing to a leveraged buy out (LBO) is the deal being offered to Hungarians. Sounds good to me!

New economic ideas

It seems to me that Ferenc Gyurcsány is in his best form when he or his party or both are in the deepest trouble. In such cases he comes up with some excellent ideas. This time is no exception. It was only a couple of weeks ago that he announced the government’s plans concerning state-owned properties which he called "New Owners’ Program." The initial interest in purchasing shares in these companies is quite promising. Yesterday he gave another speech, this time at the Academy, in which he outlined the government’s plans for overhauling the system of taxes and benefits. It seems that as far as personal income in Hungary is concerned, the tax burden is not very high by European standards. Hungary is in the middle of the pack. If you live in Greece you pay very little but if you live in Denmark it is very, very high. By contrast, the tax burden of the companies, big and small alike, is enormous. The highest in Europe: 49%! In Denmark it is only 12.9%, in Ireland 13.5%, and in the United Kingdom 18%. For the time being no decision has been made about how to overhaul the tax system. Gyurcsány simply outlined three possibilities offered by economists and financial wizards. In the next couple of months he would like to conduct a public debate about the best way of introducing necessary changes in 2009.

One of the possibilities is to raise salaries but make the employees solely responsible for paying all the taxes and benefits the employers previously paid on their behalf. Other than its modest educational value (letting people know what their real salary is once benefits are added), I don’t see the upside to this option. A second possibility is to lower personal income taxes. The rate would be 20% for someone making less than 2.5 million forints per year; above this income level it would be 30%. To compensate for the loss of revenue from personal income taxes, real estate taxes would be made compulsory. The third possibility, obviously favored by Gyurcsány, would be to lower business taxes and benefits payments from the current 49% to 22%; at the same time the personal income tax could be raised on higher income levels.

Of course, the introduction of any of these three plans will result in some loss to the budget. The most expensive from the point of vew of the state would be the second option: lowering personal income taxes. The budget would be poorer by 420 billion forints which, according to the finance minister, the state cannot afford. According to tax experts the first plan, that is passing on the burden of taxes and benefits to the employees, is less expensive (a loss of 250 to 300 billion), which is more in line with János Veres’s thinking. But according to experts this plan will not increase the number of people employed and will be beneficial only to people in higher income brackets. They also claim that it would bring about inflationary pressures. The third option–lowering the tax burdens of companies–would be the least costly from the point of view of the budget (a loss of 200 to 240 billion), it would have a positive impact on employment, and it would help economic growth. The next few months will see heated debate on these issues. But at least this will be a debate on a more important question than a 300 ft. co-payment.

Bribe for Gypsy votes?

Never a dull moment. The latest is, as it turned out, a hoax concocted by an "enterprising" reporter of HírTV. HírTV doesn’t even pretend to be anything else but the mouthpiece of Fidesz. But why would a reporter of this television station feel compelled to do something that is clearly criminal?

The story began a few days ago when István Tarlós, the independent leader of the Fidesz caucus in the Budapest City Council and Orbán’s choice to head the Fidesz referendum campaign, announced in one of the many interviews he gives daily that electoral fraud is a real possibility. Of course, the fraud can be perpetrated only by the MSZP-SZDSZ coalition. When pressed, he came up with some hypothetical possibilities, none of which sounded terribly convincing. I couldn’t figure out then or even today why Fidesz politicians resort to such primitive accusations. Do they consider the outcome of the referendum in doubt? Are their before-the-fact allegations meant to be an insurance policy in case they need to challenge the outcome? Hard to tell.

To continue the story: HírTV said it had recordings of two telephone conversations. In the first, a certain "Józsi Tóth," a Gypsy, can be heard phoning Viktor Tóth, campaign manager of János Veres, minister of finance who is also the parliamentary delegate of a district in Szabolcs-Szatmár-Bereg county. In it, "Józsi Tóth" makes veiled references to money. Viktor Tóth is obviously in a very noisy place; he also seems to be confused. He can’t figure out who this Józsi Tóth is and mutters something about discussing whatever is on Józsi’s mind later. There is, however, another recording: this time of "Viktor Tóth" phoning a certain János Balogh and offering money to Balogh for every Gypsy who does not show up to vote on March 9th. Well, at this point Viktor Tóth went to the police. He recognized the voice of the man who phoned him as that of László Tejfeles, a minority representative in the village of Nyírbogát. Later it turned out that the man who impersonated Viktor Tóth was a reporter for HírTV. Of course, the whole thing was a setup: János Balogh is the nephew of László Tejfeles. And Tejfeles belongs to Lugo Drom, a Gypsy organization that supports Fidesz. In fact, the head of Lugo Drom, Florián Farkas, is a Fidesz parliamentary member.

Before all this came to light, István Balsai, former minister of justice (then still a member of the MDF but by now one of the most vehement spokesmen for Fidesz) held a press conference in which he announced that the two recordings were proof of what they had known all along: already in 2006 Gypsies were paid off to vote for the MSZP. I assume that at the moment Mr. Balsai is quiet. Since his charge Tejfeles and Balogh have confessed, and I assume that the reporter’s identity is also known.

It is hard to imagine that this primitive hoax was the idea of the Fidesz leadership. I wouldn’t be surprised though if Florián Farkas were somehow involved. After all, how would a reporter of HírTV know who is a member of Lugo Drom in a god-forsaken village in Szabolcs-Szatmár-Bereg county?

But even if this hoax was not contrived high up on the Fidesz food chain, it is in keeping with their relentless campaign against János Veres. They first tried to bring him down by through guilt by association: a former business partner turned out to be a crook. However, the partnership lasted for only a short time about fifteen years ago. Then they tried to find something illegal and unethical about the business behavior of his sons. There too there were secret recordings. That didn’t work out either. Now here is this alleged fraud case. Not only does it not point to Veres; it ends up right back in the lap of Fidesz. It seems that the harder they try the worse things get. It’s enough to think of some of the blunders the Fidesz committed in the campaign of 2006. For instance, breaking into the server of an advertising company responsible for the MSZP campaign or the Magyar Vizsla case, a rag supposedly published by an independent civic organization but that upon closer investigation led to Fidesz headquarters through a fax number. These are dangerous games and if I were Viktor Orbán I would tell my minions to back off. Orbán has borrowed a lot from the playbook of the American Republican Party; he should also keep in mind what happened to Richard Nixon with his dirty tricks.

Railway strikes are getting shorter and shorter

I must admit that I was surprised yesterday afternoon when I heard that István Gaskó, trade union leader of the VDSzSz, had embarked on yet another railway strike.The strike began at midnight on Sunday and was, according to Gaskó, to be of indefinite duration. In this case "indefinite" meant "really short."

I woke Monday morning to the news that the strike was over; it had ended at 9:00 a.m. At 6:00 a.m. Gaskó still seemed very sure of himself when he was the guest on Napkelte. What happened in between? The answer seems to be quite simple: hardly anyone supported the strike. According to MTI (the Hungarian news agency), out of the scheduled 964 passenger trains 648 were running. Between midnight and 6 a.m. only 81 of the 1,735 employees on the shift were on strike. Yes, only 81. Between midnight and 9 a.m. 73 of the 2,746 workers were on strike. At MÁV-Start out of almost 2,000 employees only 333 didn’t work. That’s called a real flop!

On Napkelte Ferenc Pallagi inquired about the level of participation from Gaskó. Gaskó, who looked a bit mournful, answered that as far as he knew Hungarian rail traffic was "paralyzed," although he added that MÁV’s management "ran some empty railroad cars," which was nothing but a waste of money. He was equally optimistic about the duration of the strike. His men are determined. If necessary they will hold out, just like the German workers, for half a year. And what about the strike fund? According to Gaskó this is the least of their problems. They have plenty of money. After all, they haven’t struck for seven years and therefore they have plenty of money. Moreover, other trade unions are helping them financially. Of course, there seems to me a bit of a contradiction here. If the VDSzSz is swimming in money, why do they need financial help from other trade unions?

This afternoon at 3:00 p.m. the negotiations continued. Neither side is giving in, but somehow I have the feeling that it will not be István Gaskó who will come out victorious from this affair.

Thoughts about the referendum

Yesterday I quoted a first-rate opinion piece about pseudo axioms. In it, among other things, the author, Kornélia Magyar, stated with great conviction that the referendum would be a sweeping victory for Viktor Orbán and his party. There are others who think differently. Perhaps even Viktor Orbán himself. After some delay I managed to watch a fairly lengthy interview with Orbán on MTV’s "A szólás szabadsága" (Freedom of Speech), a weekly political program on Sunday nights. György Baló, who was a bit braver than usual, asked a few uncomfortable questions from Orbán. But Orbán is no fool: he can get out of sticky situations by simply talking about something else. The interview began with one of these sticky questions. It went something like this: "In one of your speeches you talked about the necessity of a sweeping victory on March 9th which would result in sweeping political changes. What would you consider to be a ‘sweeping’ victory?" Well, that was a very uncomfortable question. "Sweeping" is a strong adjective and when we hear the word we really think of something very, very big. Orbán refused to answer. Wisely, I think, because although no one dares to predict exact figures there are more and more signs that a sweeping victory might be in doubt. As a political commentator said just today: "The direction of the wind hasn’t changed yet but there is something in the air." I also feel a certain change although I cannot put my finger on it. However, here are a few signs of the change.

The very fact that Orbán’s speech about the state of the country was moderate in comparison to his earlier belligerent harangues raised my suspicions. There have also been other signs since. While a month ago 21% wanted to see Viktor Orbán as prime minister of Hungary, today it is only 15%. Only half of the Fidesz voters want to see a government headed by Orbán, the rest are not sure, or rather 18% are sure that the prime minister should not be Orbán. Acccording to an undisclosed source, a political scientist close to Orbán warned him that he shouldn’t raise the stakes too high because even if the referendum is successful but nothing monumental happens afterwards the disappointment in his camp might be so severe that "it may negatively influence the party’s chances in 2010." Others apparently went even further: if there is "no sweeping victory," the influence of the referendum will have a negative effect on the Fidesz voters.

At the same time there are more signs that the medical profession no longer shows a united front. Since the government made it clear that if there is no co-payment and no daily fee at hospitals the doctors and hospitals are not going to be compensated, an ever increasing number of doctors and hospital directors are urging people to say "no" on March 9th. The Magyar Demokrata Fórum (MDF), which initially was against these fees, has changed its position. A few days ago one could read on MDF’s home page that in the opinion of its leadership the abolishment of these fees will be harmful to the profession. Therefore the party urges its followers to either boycott the referendum or vote "no." As for tuition, a clear victory there has always been in doubt; the presidents of the 72 universities are solidly behind tuition.

Then there is Lajos Kósa, the mayor of Debrecen, who is currently the most popular Fidesz politician. A few days ago Kósa gave an interview in which he pretty well indicated that if circumstances were appropriate he would be glad to become a candidate for the prime minister’s office in 2010. The next day Orbán visited Debrecen and, when asked about the Kósa interview, he remarked: "Lajos gives very entertaining interviews." Some commentators, in my opinion, overcomplicate matters when they claim that this is just a game that Orbán and Kósa have agreed to play. I don’t think so. Kósa knows what he is talking about. He and many others in the party most likely know that Orbán’s position is anything but solid and that his position might be further weakened if the victory is not sweeping, or, even worse, the referendum is not valid.

And finally, TV2, a commercial station, conducted an on-line survey (not a random sample, of course, but interesting nonetheless) on the question of whether co-payment should remain in force. Twenty-five thousand people voted: 56% yes, 42% no. Perhaps, after all, the victory will not be so sweeping.

“In the captivity of pseudo axioms”

This is the title of an excellent political commentary by Kornélia Magyar that appeared in the February 23 issue of Népszabadság. This is the first time I have encountered her name or the institute she works for: Progresszív Intézet (Progressive Institute). After a little research I found out that this institute is part of DEMOS Hungary, a political think tank belonging to the DEMOS family of institutes whose main concern is public policy research. It is also an advocacy group. The Hungarian DEMOS was the brainchild of Tibor Dessewffy, a sociologist. If someone would like to learn more about DEMOS, here is a link:

But let’s go back to Kornélia Magyar’s opinion piece. I guess I liked her article so much because I have been very dissatisfied with the level of political analysis of late. Time after time I stop reading opinion pieces half way through. I don’t know whether I have changed or they have, but commentators whose writings I could agree with a couple of years ago today write what I consider nonsense. I think Ms. Magyar puts her finger on the problem: "The cloudy vision of political commentators is due to pseudo axioms that are considered to be unquestionable but are actually easily refutable."

One of these pseudo axioms is that Viktor Orbán keeps Ferenc Gyurcsány alive. And vice versa. It is in the interest of both men that the other remains on the scene. This brilliant thought is usually followed by the equally brilliant conclusion that both men should simply disappear and Hungarian political life would be tranquil again. As if these two men appeared on the scene completely independent of circumstances. Nobody called them in, nobody wants them to stay. The commentators who are enamored by this "revolutionary" idea seem to know very little about politics. Because "strong, charismatic individuals" will come up time and time again. It is not by chance that the leaders of the two large parties are charismatic men. If for one reason or other they disappeared, their followers would seek similar people to lead their parties. Moreover, it is an utterly false assumption that it is in the interest of, for example, Viktor Orbán, to have Gyurcsány around. The truth is exactly the opposite: it would be outright beneficial for Gyurcsány to be out of the way. This is exactly what Orbán wants to achieve. I also think that Gyurcsány would be the happiest if Orbán disappeared from the scene. So the idea that these two people keep each other alive is outright ridiculous. But the media is full of it.

The other pseudo axiom is that the electorate was never so fed up with politics as now. They turned away and why? Because of the behavior of the two parties and their leaders. This is also not true. It seems that some people like to write more than to read–i.e., to check the facts. According to an old Szonda Ipsos poll, half way through the Orbán government’s tenure 46% percent of the people were unsure about their party preferences or indicated that they had no intention to vote. Two years after the Medgyessy government took office this number was 41%, and half a year after Gyurcsány became prime minister the number was 45%. According to Median today this number is around 27-30%. Thus the situation today is better than it has been in the last eight years. Yet every second article mentions this falsehood.

But let’s continue with other pseudo axioms. One often hears that no government was hated as much as this one. Ever. This is also untrue. Each government has had its bad periods. During the Horn government only 12% of the electorate supported it (1997 January-March). During the Orbán government (December 2000) 17%. Gyurcsány’s worst number in his first term was 20% (June 2005). Today support is low–15% (January 2008), but in line with the low points of previous governments.

Another favorite axiom is that Gyurcsány will lose his position if the referendum favors Fidesz. Indeed, according to recent polls the Fidesz will have no problem getting either the necessary participation or the number of "yes" votes. According to some people, the number of "yes" votes might even reach three million. About one million more than needed. Thus parliament will abolish co-payment, hospital fees, and tuition at universities.  If all this is already known, nobody will be suprised. It will not be a huge shock to the MSZP, and therefore it is unlikely that there will be a palace revolt against Ferenc Gyurcsány. As Gyurcsány said in his blog: "What will come after March 9th? March 10th!"

The real question is, as Kornélia Magyar concludes her article, not whether Gyurcsány will go but whether he will be able to come up with new programs, new ideas. Can he show positive results of the reforms: will there be better health care, less taxation, will there be "ownership," will there be a larger and more prosperous middle class? It is not the referendum that is important but whether the prime minister can come up with a strategy to turn things around.