The non-existent IMF/EU demands in exchange for a Hungarian loan

Viktor Orbán is making a liar out of me. Just twenty-four hours ago I gingerly put forth my opinion that the Hungarian prime minister may at last have realized that he is at the end of his rope and that an agreement with the IMF/EU is absolutely necessary for the sake of Hungary’s economic health. I was encouraged by Péter Szijjártó’s announcement that Viktor Orbán will pay an official visit to Germany and will have a lengthier talk with Chancellor Angela Merkel. I also thought that the Azeri fiasco made Orbán understand that a return to orthodox, well tested policies is the only solution to Hungary’s economic ills.

And then came this morning when I learned that Viktor Orbán is refusing to negotiate on the basis of a list of demands that the IMF allegedly handed to Mihály Varga, the chief Hungarian negotiator. The first question that crops up: when did this letter arrive? After all, only yesterday Orbán talked most optimistically about the negotiations. He emphasized that the positions are not too far apart and that there is a desire on both sides to conclude the deal. If all was well yesterday, then this letter had to arrive sometime late evening. Most unlikely.

Moreover, and much more important, the IMF doesn’t normally hand a laundry list of specific demands to the negotiators of a country asking for a loan. Instead, the country’s financial team puts forth proposals that they hope will satisfy the IMF’s demands for a sound economic policy. The finance minister with the assistance of the staff of the ministry works out a plan that best suits the particular country.

The Fidesz-KDNP parliamentary delegations gathered yesterday for a two-day retreat in Sárvár, close to the Austrian border. According to information received after the conclusion of the afternoon meeting, although Orbán gave a fairly lengthy talk he said nary a word about the Azerbaijan fiasco. On the other hand, it was known already yesterday that the IMF negotiations would be discussed. Antal Rogán, the new whip, “asked [Orbán] to inform the parliamentary delegation about the demands the IMF and the European Commission presented to the Hungarian government.”

Not surprisingly, it was Magyar Nemzet that already yesterday managed to get the list of alleged demands which they published in this morning’s print edition. According to this published list, the IMF demands a decrease in pensions; raising the retirement age; lowering the size of child support; raising the VAT; a privatization of state properties; restricting the number of travel allowances for selected groups; a decrease of the bureaucracy; the introduction of property taxes; lowering the expenses of local governments; a repeal of the bank levies; and government assistance to ailing banks. In addition, Magyar Nemzet noted that the transaction tax might be a problem.

By this morning the list grew even longer. Some of the people present who talked to members of the media mentioned a very long list of perhaps 20-25 items, including several that Magyar Nemzet reported: a cutback in the salaries of government and public employees; a generally applied property tax; the lifting of state control of energy prices; the privatization of state properties; and a decrease in expenses at the local level.

Doubts surfaced very quickly about these so-called demands of the IMF, especially since members of the media remembered that Mihály Varga, undersecretary in charge of the negotiations, specifically denied that the issue of property taxes was even mentioned during the talks. All in all, most reporters doubted that the Hungarian government had received any list of demands yesterday, certainly not these demands.

Then I remembered that András Simor, chairman of the Hungarian National Bank, mentioned on August 27 that the negotiating IMF-EU team had left a letter with the Hungarian government back in July and that the continuation of the negotiations would depend on the government’s response. At the time rumor had it that the Hungarian government hadn’t responded at all. I asked myself: could that be the list of so-called demands?

Viktor Orbán didn’t ponder the niceties of historical accuracy or internal consistency. This morning he received “the endorsement” of the parliamentary delegation and this afternoon he announced his decision on Facebook to “reject” these demands. He announced that the steps the IMF requires are not in the interest of Hungary and “at that price” the Hungarian government is not interested in a continuation of the negotiations. The Fidesz-KDNP delegation “authorized” the cabinet to work out an alternative plan in the next few days.

It took only a few minutes after that announcement for the forint to drop as much as 1.7 percent before paring its losses. Investor belief that Hungary will conclude a deal with the IMF has kept the forint strong. Just this year the forint has gained 9.5 percent against the euro. But gains, as we all know, can quickly turn into losses if the investing rationale becomes a fairy tale.

Both AP and Reuters immediately reported on Viktor Orbán’s decision and the news reached all the major newspapers within minutes. The funniest headline describing the affair appeared in the online paper Business Insider: “Hungary Just Flipped the Bird to the IMF over Bailout Terms.”

But just as the press got excited about Viktor Orbán as one of those Europeans who are getting fed up with austerity measures, it turned out that the “list of demands” by the IMF is a figment of the Hungarian prime minister’s imagination. In no time Index got hold of the letter András Simor mentioned a couple of weeks ago. It was this letter, it seems, that Orbán decided to call a list of hard-and-fast demands on the part of the IMF. It turned out that there are no specific demands in the letter, only the long repeated request to implement measures the IMF and the Commission have been urging for years. There is nothing in the letter about the overhaul of the personal income tax regime or social spending. They do, however, want a restoration of the rights of the Constitutional Court, a demand blithely omitted from the official Hungarian reading of the text. The letter also asked the Hungarian government to give up the idea of a transaction tax on the Hungarian National Bank.

I really don’t know what to think. Magyar Nemzet, most likely relying on government sources, publishes a bogus list that the prime minister of the country confirms as genuine.

So, what are the specific suggestions that the IMF made in July? When the ball was then in Hungary’s court?  There were three items: (1) an exemption of the Hungarian National Bank from the financial transaction tax; (2) phasing out the special tax on banks and telecom companies;  and (3) a restoration of the rights of the Constitutional Court in dealing with budgetary issues.

In general terms, the IMF/EU want to see: (1) expenditure cuts; (2) a simplified tax system that burdens the private sector less; (3) incentives to boost employment and economic growth (partly through taxation); (4) lower burdens on companies and banks so that lending may start to grow; (5) regaining investor confidence; (6) transparent and calculable medium-term economic policy and regulatory environment; and (7) reforms (public transport and the curtailing of local government spending).

I think it is worth mentioning that Index makes it clear in the article on the true content of the IMF/EU letter that it is a highly guarded document handled as a secret record. Yet the reporter of Index was allowed to read the five-page letter and to take notes. Surely, there are some, most likely highly placed individuals in the government who consider the policies of the Orbán government so injurious to the country that they are ready to bring secret documents to light.