The immediate results of the “nationalization” of private pension funds

Of course, it is more than a “nationalization” of private property. It is an illegal expropriation of private property. Some commentators compared the government’s methods to those of the mafia. Others called Orbán’s Hungary a banana republic. Some people talked about a nightmarish move or a hair-raising event. And then there is the blackmail the government is employing to make sure that all participants in the pension funds agree to the transfer. How can they not when otherwise they will be deprived of 75% of the future pensions they are legally entitled to?

So let see the market reaction to this latest move. First and foremost, Hungary failed to sell the planned amount of debt at an auction today as the forint weakened and bond yields climbed higher than they were in June when two Fidesz officials and MPs raised the possibility of default. Here are two graphs showing the situation. The first is forint-euro exchange rate for the last twelve months. The second is a graph showing the results of three-month T-bill auctions.


According to analysts bond yields may rise “quite significantly” as the exit of private pension funds wil lead to a drop in demand for local debt. Let me explain what is behind this prediction. The private pension funds by law had to put a large portion of their customers’ money into government bonds. Once the funds are gone the sale of bonds at home will drop considerably. As it is, the state debt management agency (Államadósság Kezelő Központ) sold 30 billion forints ($144 million) of 12-month treasury bills, 10 billion forints less than planned, as the average yield rose to 6.05 percent from 5.94 percent at the previous auction on November 11. Bids also fell to 64.5 billion forints versus 89.3 billion forints at the last sale.

Some analysts expected an even grimmer placement and a lower bid to cover ratio than that, but it is almost certain that the situation will change for the worse as “private pension funds will gradually cease to represent a demand factor.” As it is, the yield on government long-term bonds (due in February 2015) rose to 7.642 percent, the highest since January. Thus borrowing money is getting more and more expensive. It is worth recalling that Fidesz in opposition promised exactly the opposite of what has actually happened. Fidesz politicians kept saying that yields will be at least two percentage points lower after they form a government because the Gyurcsány and Bajnai governments lost credibility. On the other hand, they have an excellent reputation in the world of finance.

The forint just this month weakened 2.1 percent which according to Bloomberg is the worst-performing currency for the period. According to Michał Dybula, an economist at BNP Paribas in Warsaw, “the pension system changes will increase long-term risks, while short-term gains such as lower public debt and deficit will prove illusory, if the economy stays weak.” Moreover, the proposed changes in pensions increase the risk of a credit rating downgrade, since Hungary’s structural fiscal position is unlikely to improve. According to Dybula, “it could actually deterioriate over the medium- and long run.”

Let’s add to Hungary’s growing problems the extra taxes on foreign, especially German businesses. Someone mentioned in the comments that because German companies are being hit hard and because Germany is a very influential player in the Union these extraordinary levies might backfire. It was almost two weeks ago that a strongly worded response came from Germany. Guido Kerkhoff, a member of the board of directors of Deutsche Telekom, condemned the Hungarian government’s anti-foreign policies. Deutsche Telekom understands the difficulties and appreciates that the government must resort to extraordinary measures, but Kerkhoff was taken aback by the way Hungary handled the whole affair. First, there were no negotiations, no early warning. The very heavy extra tax was simply announced one day. And what was entirely new: it was retroactive. Kerkhoff “has never encountered anything like that.” Well, Kerkhoff is not alone. It is illegal to enact laws retroactively.

Kerkhoff reminded people that the German company has been investing heavily in Hungary in the last fourteen years. The total investment of Deutsche Telekom is 1.2 billion euros. In the past the company’s relations with the Hungarian governments were excellent but “now I can’t quite believe what’s going on.” According to Kerkhoff the extra taxation will deprive the company of 42% of its 2010 profit. If these taxes remain in force for four years, Magyar Telekom (the Hungarian subsidiary) will pay 400 million euros, which is 16% of Magyar Telekom’s market cap value.

Deutsche Telekom expanded into Macedonia and Montenegro through Magyar Telekom, but in the future they will not be able to continue to expand in Hungary. It seems that Budapest “is breaking too many porcelain pieces” and he is not sure that the Hungarian politicians are quite aware of the consequences. He reminded his audience that the 1.2 billion euros that Deutsche Telekom has invested in the country is more than Daimler Benz is promising. Moreover, Deutsche Telekom was planning to invest more, but after the government’s levies they will most likely have to rethink their strategy. As for whether Deutsche Telekom is planning any legal action, Kerkhoff said that they are waiting for the the European Commission to ask for some explanation.

Although the British Guardian a couple of days ago asked the European Commission to pay some attention to what’s going on in the middle of Europe, it seems that the Commission at least keeps its eyes open and “worries.” Amadeu Altafaj Tardio, spokesman of Olli Rehn, the financial commissioner, announced that the commissioner would find it “worrisome if the Hungarian government were to spend the accumulated savings in the funds on current expenses as the 2011 budget seems to suggest.” It is also upsetting that the “free choice” between private and public social security funds “is not as free as it first looked.”

It is all very nice that the European Union finds all this worrisome, but we will see whether they do more than wring their hands, whether they will tell Viktor Orbán to cease and desist. Because it seems that he understands only the same kinds of threats he levels against his “subjects.”


  1. The European Commission is spineless. The EC/EU have all the leverage given Hungary will assume the Presidency for 6 months from January 1. It is clear to me at least that Hungary should forfeit this position. The Government is lawless and irresponsible. That the Hungary will suffer very long term is without question. Whether there is much collateral damage to the rest of Europe is an open question. There is absolutely no way the country should get the honor or responsibility of the EU Presidency. This will not happen, however. Senior members of the Government should be actively shunned, like Haider and Austria were, and a real political price should be paid. This also will not happen.
    In the end, what will kill Hungary is that it is small and irrelevant. Capital will flee. Forint will sink. More ofthe educated and well off will leave (this year more than 50% of all the Hungarians graduating from medical school will seek to work abroad). Hungary will be treated like the always drunk uncle at a family gathering. Shoved in the corner away from the guests. Problem is this is can be a slow and painful way to go, when a rapid crash landing is what is called for.
    In the meantime, Orban will tell the people that all they are doing is cleaning up the mess of the communists (and the people will it seems for awhile at least believe him), while he does his best to recreate the closest thing to a lawless, non true democratic state in Central Europe since 1989.

  2. But what NWO and Eva seem to fail to acknowledge, is that the previously-applied version of development, let’s say the era between 1995 and 2009, which was largely based on FDI – also seems to be broken, and an economic approach based solely on this has become politically unacceptable. Ireland being a case in point. If all you want is a return to the political economy of 2006-2009, then I am afraid you will not meet success.

  3. Whatever-
    You are correct. The old model of economic development was not entirely successful, and proper regulation was lacking but is essential in a successful market economy.
    My issue with the policies of the Government are manifold, but the fundamental issues that are now front and center in Hungary are not about economic policy, but about the rule of law and the nature of democracy. Fundamentally, democracy is not just about majority rule. And a political system where all checks and balances are removed and the law is only applicable to the extent the Government at the moment likes it and institutions only exist to the extent they do the Government’s bidding is, is not in any sense a true healthy democracy. It is inevitably an autocracy.
    As for economic policy, the Government’s strategy is basically to fund a broken welfare state by usurping private assets of the population and levying ridiculous levels of tax on major investors while shielding friends and interests of the Government. Somehow I do not see that as a viable long term strategy. But what do I know?

  4. Dear Eva,
    it is tempting to hope that the EU could change matters but would it not be considered inappropriate (“not democratic”) by most Hungarians as the support for Orban (despite all his moves) is still fairly strong? Or did that change in the past few days? I always thought that a possible route could be that some Hungarian citizes address the European Court of Justice that they are denied rights that Hungary has committed to in the accession treaty. But that EU officials try to rectify matters in Hungary that (apparently) do not trouble a substantial part of Hungarian citizens cannot be successful (even with best plans and intentions) as long as the support from within for Orban (perhaps not with the pensions but with Trianon, “bad communists” etc.) and the national case prevails.

  5. NWO – I fear you are right. The Hedge Funds etc. are using some of the monies from the various attempts of Quantative Easing to speculate against the Euro. The pickings here are large if you can almost destroy it. The rest of the Quantitive Easing is being lent to the emerging economies rather than being lent to their own people.
    Once they have made their killing from the Euro the speculators will then attack the Pound Stirling and the Danish Krona.
    Eventually they will go for the Hungarian Forint which I have read is some 35 to 45% over valued. But this is pretty small beer but a very easy target to attack.
    The present outfit in power (I will not call it a Government) seems to regard inward investment as a source of revenue (some of it for their own personal use). This will slow down the current work in progress and delay future start ups.
    Professor you write ** “It is all very nice that the European Union finds all this worrisome, but we will see whether they do more than wring their hands, whether they will tell Viktor Orbán to cease and desist. Because it seems that he understands only the same kinds of threats he levels against his “subjects.” **
    I am certain that The EU in general and the Commission in particular have been sending messages, letters other and embassies expressing their unease. Unlike the ‘Mighty One’ Europe does not like, or use, until push comes to shove, megaphone diplomacy.
    Part of the solution will be to by-pass Hungary in the rotating presidency but this would annoy the Hungarian public who see only the ‘appearance’ and not the ‘substance’. I think it more likely that they will allow the ‘Mighty One’ and his doings to become the focus of the European tabloid media. It is called ‘giving him enough rope to hang himself’. If the ‘Mighty One’ does ‘top’ himself, politically that is, what then?
    I cannot see him being welcomed at No10 (Downing street) although he has meetings with the German Chancellor and the President of France, but this was before the latest shenanigans. He has given the Hungarians more than enough phantom enemies to hate for the moment and that at the Koscma level will keep him in power.
    Professor you remark almost in passing that ** “It is illegal to enact laws retroactively”. Oh yes it is indeed. It is one of the fundamental laws ot the whole ‘EU’. The fines, damages, and other penalties from the European Court will make several telephone number look very small.

  6. Responding to Kirsten. The latest polls still show strong support although somewhat less than a month ago. But we must remember that the current polls are about two weeks old. They had been taken before the coup against the prive pension plans took place.
    My feeling is that the mood is changing. For example, tomorrow MSZP + Gyurcsany’s Democratic Coalition + Hungarian Democratic Charta will hold a gathering which will be held in a sport arena able to hold 10,000. People who wanted to attend had to get tickets. It turned out that there were more applicants than seats. The overflow will be able to see the event on monitors. A month ago I don’t think that MSZP would have been able to get together a large crowd like that.
    People who phone Bolgár report that many friends and acquaintances who voted for Fidesz are very disappointed.
    Most political analysts expect a real change in public sentiment sometime in the spring. By that time people will get their paychecks and 80% of the people will see no difference or will receive slightly less money. I just read that unemployment is still 10.9%, exactly the same as in the last three months.
    As for the EU. The nationalists who voted for Fidesz are no friends of the EU and were very pleased when Orbán snubbed the IMF. They always love the extra taxation on foreign firms. I’m almost sure that they blame the EU for the the pension fiasco as well. If the EU would have allowed Hungary to calculate into the deficit the monies currently on private accounts then, they claim, Orbán wouldn’t have had to resort to such a move.
    As for the European Court of Justice. My understanding is that people are planning to go there with their grievances but first they will turn to the Constitutional Court. Of course it is very possible that the Court will simply say that they have no jurisdiction in this case any more.

  7. Although disliking the development in Hungary, I don’t think the EU is the right actor to take steps here. Official steps against a member country need to have a thorough legal basis (at least if we really want to defend the principle of rule-of-law). It doesn’t matter, if the Hungarian government violates Hungarian (constitutional) law. For the EU to get active, they have to violate EU law. And indeed, the way to European jurisdiction is long and takes time, as you have to go through all levels of national jurisdiction first.
    Pragmatically I also wouldn’t like symbolic measures. It didn’t work in Austria in 2000 and I’m afraid it only helps the (ultra) right in Hungary.

  8. Mr Sanyi. You are quite correct in that the EU must have a thorough legal basis for their actions. That is why pressure is being put (and ignored by the Mighty One) ‘sotto-voce’. I do not think that the Hungarian Constitutional court will act. If it does it will have its budget cut to 10HuF etc. No I am afraid it will be up to individual to sue the Hungarian Government for ‘Breach of Contract’.
    What surprises me is that the Hungarian Authorities (it is no longer a Parliament) has not passed a law which says that you cannot sue anyone in government or the ministry/minister for any form of perceived wrong doing, and to do so or to attempt to do so is a criminal offence punishable by summary justice. They will have add that this law is outside the jurisdiction of the Constitutional Court (or any other court come to that). That should scupper any nonsense of litigation. Since you cannot sue in Hungary it cannot go to the European Court, Job done!
    Professor whilst I will agree with you about the case of Austria, Hungary is different. It receives large sums of European money from the development funds. Any half competent bureaucrat can delay (for a very long time) such payments.

  9. In the end, the Hungarians themselves will have to do away with Orbán, one way or the other.
    But EU pressure helps: no megaphone politics, but diplomacy, criticism, shunning meetings with Orbán when Hungary is EU president in the first half of 2011 (that will be a very new and interesting experience for Brussels)and maybe even doing something with payments and refusing to come to assistance if things go wrong financially (and they will)unless certain conditions are met etc. All in all, I think the EU has lots of instruments to put pressure on Hungary.
    As do markets: they are seeing Hungary more and more as a serious risk. A downgrade of Hungarian bonds to junk statusis around the corner. The forint will slide, taking loans will be more and more expensive, investment is already strating to dry up. Again, a lot of pressure making the realisation of Orbán and Matolcsy’s irresponsible economic adventure less and less unlikely.
    And yes, slowly but surely there will be more and more protest, not only from the streets (trade unions, employees), but also within Fidesz. Already, conservative constitutional experts are outraged, as are many conservative economists and analysts. At some point, even conservative politicians might have had enough and we can, I hope, move on to the scenario that has been playing out in Poland (where the Kazcinsky’s were sidelined by decent conservatives) and that is evolving now in Italy (where Fini tries to sideline Berlusconi).
    As for a time line, that is unpredictable: it can be spring, but it might be only in two or three years, or even after the 2014 elections if they are held, at all. The more time it takes, the more serious damage will have been done: to the economy, to the social fabric, to the institutions of democracy. Repairing all that will, again, take years.

  10. The main problem facing the EU at the minute seems to be the effort to shore up the Euro against possible collapse. Hungary, at the moment, is well down the list of priorities so don’t expect much action from the European Commission for the moment. Maybe in a year or two when Orban runs out of short term fixes and the budget becomes critical again the attention will return. By then who knows what the European economy will be like.

  11. Not unlike any other country that has fallen for increased privatization of public goods (Egypt comes to mind as an extreme case), whereby the wealth generated by a nation is allowed to be channeled into private hands.
    It is unfortunate that now the government is ‘compelled’ to nationalize pensions to make up the difference extracted by multinational corporations over the last 20 years. Extracted through the lobbying for favourable tax regimes, development grants, and the opportunity for multinationals to relocate business divisions to minimize tax burdens.
    The scapegoat for any nation that has embraced capitalism uncritically is a government who formulates policies that support wealth creation at the expense of social and economic stability for the absolute bulk of its citizens.
    In other words it’s only the fault of government insofar as it buys into a privatization ethos, the bulk of indictment rests on multinational’s collusion with governments, the ‘moral’ imperative to maximize profit combined with the unassailable right to private property, and the outsourcing model that uses borders to avoid giving back to the communities that funded a business’s growth and expansion.
    Hence the real need today for the nationalization of key industrial sectors: steel, banking, auto, etc., otherwise what has been evidenced across N. Africa will become increasingly the global norm.

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