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.