Negotiations are still far away between Hungary          and the IMF and the EU

It is hard to get used to the Orbán government’s way of handling the truth. It is against my nature to doubt every statement that is released or every word that is uttered. I am not naive enough to think that politicians always tell the truth, but outright lying is not acceptable even in political circles. Or if someone does it and is found out, there are usually consequences. As there should be. Not in Hungary.

So, when a few minutes after noon today the news came that “Hungary’s financial negotiations with the European Union and the International Monetary Fund will begin on July 17 in Budapest” at first I was just surprised. A few minutes later my suspicion grew about the veracity of the news because HVG reported the story differently. It turned out that  Olivier Bailly, spokesman for the European Commission, announced only that a joint IMF-EU delegation will arrive on that date, not to begin negotiations but to prepare the ground for possible forthcoming negotiations. That is an entirely different thing, as eventually MTI had to admit. An hour after the initial announcement MTI asked its customers to correct the report from Brussels. The title of the corrected news read: “The EU-IMF delegation will arrive in Budapest on July 17.” In the text they added that “following that date the negotiations may begin soon.”

The reporters must have confronted Mihály Varga , the minister in charge of the negotiations, about the real story and Varga must have been a little annoyed because he claimed that “negotiations begin when we start talking to each other.” However, a few hours later he changed his mind and admitted that “the negotiations will have two phases. The first will start on July 17, to be followed by a short break, and they will continue at the end of August or the beginning of September.” If I interpret this correctly, the timing of the actual negotiations will depend on the success of the talks starting on July 17.

During the last few days an increasing number of people have expressed their belief that Hungary shouldn’t expect quick or easy negotiations. I would go even farther. In my opinion there remains the possibility that Hungary doesn’t want to see the negotiations through to their final phase and is going ahead with the preliminaries only to fool the financial markets. That is, it’s trying to play the Turkey card. If the government were serious, it is unlikely that a few days before the revision of the bill on the central bank the government would decide to slap a tax on the transactions of the Hungarian National Bank. And that they would do that without any consultation with the European Central Bank or with the chairman of the Hungarian National Bank.

Monetary policy is under attack in Hungary

If they had consulted, they would undoubtedly have been told that they were once again stomping on the independence of the central bank. The Hungarian National Bank is in charge of monetary policy, which means that it controls the money supply and sets interest rates with a view to promoting economic growth and stability. The government is responsible for the country’s fiscal policy–for taxation as well as government spending and borrowing. By taxing the central bank, the Orbán government is interfering with the monetary policy of the central bank. In the bank chairman’s opinion, if the central bank were to pass on the transaction tax to its customers it would in effect be lowering the current interest rate by 2.5%. Thus, the government is interfering with the exclusive domain of the central bank, setting interest rates.

To be in compliance with its mandate, argues Chairman András Simor, the Hungarian National Bank cannot pass on the approximately 100 billion forint  annual loss it would sustain as a result of the transaction tax levied on it. Instead, it turns out, the government has to absorb it. According to Hungarian law, any loss sustained by the national bank in any given year must be made up by the government from the budget of the following year. Thus, whatever the Orbán government would gain by taxing the central bank’s financial transactions, in say 2013, it would lose a year later.

Péter Róna, a Hungarian-born economist who spent most of his life in the United States and the United Kingdom, claims that there is a European Union law that  forbids levying  a transition tax on central banks. If this is true, I see no way of avoiding a repeal of this particular law, and that again would take ages. That is, if Viktor Orbán is willing to oblige.

There are other serious problems to starting negotiations. For example, the proposed 2013 budget seems to be on very shaky grounds, especially since the government decided on a new plan that would include a 300 billion forint project for job creation. The problem is that the proposed funds to cover the cost of the stimulus package are “mostly fictive,” as several analysts claim, especially if the transaction taxes on the central bank and on the treasury cannot be levied according to the European Central Bank and the European Commission.

All in all, I still maintain that Viktor Orbán is in no hurry to negotiate. How long  the Hungarian government will be able to convince the bond market that the IMF and EU will provide a safety net remains an open question.


  1. Isn’t it a wonder with what aplomb the Hungarian government continues to saddle the country with 9% cost of its government paper? The Italians and the Spaniards are at their wits end with government cost at 6.5%. We (Hungary) must be secretly rich, otherwise the Felchutian has his foot-to-the-metal as he drives Hungary to bankruptcy.

  2. Government manipulation of judicial process should be exposed: the KlubRadio case should be submitted to an international panel of jurors–Brit/American/Canadian–and have them comment. How could this be done?

  3. The one thing that will push the Govt to move fast (by its standards) is that they have already baked the interest rate savings that would come from an IMF deal into next year’s budget ( which they already wont make). Anyway, having said that, there is no doubt that these guys never miss an opportunity to miss an opportunity.

    The IMF will come with a lot of conditionality (good). This conditionality will be in the form likely of even further cutting/tax rises (not so good). The economy cannot take further short term measures like this. Instead, the IMF should allow some short term expansionary measures but only if tied to real long term reform of the pension system, retirement age, health care system and municipal finance.

  4. @NWO, what I think it baked in is the expected drop in the HUF w.r.t. the Euro. That would take the sting out of the 9% interest rate. As for raising taxes…. taxes are already too high and any further increases would put even greater drag on the economy. So one has to be creative at this point in time. I would say that a better choice then expansionary measures is to simply become more attractive for businesses to setup here.

    Every person that becomes employed not only stops taking, they start contributing. But alas, the environment here isn’t very business friendly which is why I’ve never started a business here. My wife started a business here and it’s been so painful that she regrets ever setting it up. However she needs it as there is no other way for her to work as a self employed person. Why is it a pain? Well, there is no possible way to plan because the rules change radically and seemingly randomly.

    Small businesses, the back bone of most western economies, are penalized. My has been legally forced to join chamber of commerce here even though there is 0 benefit to do so.. in other words, this is simply another hidden tax burden that’s been placed on her. My Hungarian friends who have been very successful in the US say there is no way they could have built their businesses here. In fact one tried to build a company in Szeged based on his company in the US and the red tape and changing regulations, lack of support for research and innovation… just killed it. He went back to the US and it works just fine…. so not a bad idea poorly executed, just an environment that is not structured to support success.

    So these so called economic geniuses can beat their chest all day but at the end of the day they got wealthy stealing state property errr, buying it for pennies on the $$$ and then flipping it.. They funnel government money through their companies @ inflated rates that would never stand in a competitive environment. Wow, now that’s a hard way to earn a living.

  5. LwiiH :
    My has been legally forced to join chamber of commerce here even though there is 0 benefit to do so.. in other words, this is simply another hidden tax burden

    We were told suddenly to pay for this chamber fees by accountant without knowing any details – she said just pay by so and so date! Checking their website came to zero info. Yeah, zero benefit to become a member. From where I came from (a developing country) , at least the chamber provides a few perks for joining. It is unbelievable that they don’t even try to pretend they know how to run things..

    300 Billion job creation project.

    Does anyone know more details on this?
    Hopefully it is not another way for the people at the top to funnel money to their buddies’ pockets.

  6. Enuff: Hopefully it is not another way for the people at the top to funnel money to their buddies’ pockets.

    Unfortunately, it is exactly that.

  7. Győr Calling!

    How Orban thinks he could placate the IMF one minute with the Central Bank changes – which allowed the IMF pre-amble to start, at least – then to apply the transaction tax to the MNB and not realise that it was challenging the authority by another route in the same way is simply astonishing! – Or extreme foolhardy willfulness.

    How these politics play on the International stage can only indicate a sort of political Asperger’s syndrome – affecting the whole government. (Anybody want these bones we need to get rid of?)

    (And anyway – Most economists get their forecasts wrong – but how wrong can you be? The projected income from the transaction tax has been all over the place – as has the Budapest congestion charge projection – as has the telephone tax – as has………)

    6th form economics! Dangerous International finances.

    Dear György Matolscy! Not the sharpest knife in the drawer – his ‘creativeness’ does at least give us a laugh this side of the English channel (- Oops I’m not there at the mo!)

    I’m sure the IMF will make Hungary a laughing stock

    Orban? I’d pull out now if I were you! The markets have you sussed!



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