Perhaps there is somebody after all who can stop Viktor Orbán. Well, not all his illegal and undemocratic plans that are harmful to the country and its people, but at least some of his madcap financial schemes. Those heartless capitalists, this time in the guise of a key credit ratings agency, are weighing in once again.
Lajos Kósa, deputy chairman of Fidesz and mayor of Debrecen, may speak of the credit ratings agencies dismissively, but when they decided to downgrade Hungary’s bonds to junk status the negative consequences for Hungary’s finances were considerable. And it seems that one of the three important credit agencies (Moody’s, Standard & Poor’s, or Fitch) recently transmitted some bad news to the Hungarian government. The message apparently was that if the Orbán government refuses to repay the considerable debt that mostly Fidesz-led municipalities have piled up since 2006, it will deem Hungary to be in default. And that is a serious threat with very serious consequences: a complete breakdown of the country’s borrowing ability without which the Hungarian economy would come to a screeching halt.
What prompted this threat? On October 27 Viktor Orbán announced that the Hungarian central government will come to the rescue of debt-ridden municipalities and will take over 612 billion forints of their debt load. The speech in which he announced the decision was described as “belligerent,” and the Hungarian banking community considered it a new “declaration of war.” He described banks as institutions that engage in usurious transactions [he talked of sápszedők]. At the end of the speech he said that “those who look ahead and have some fears might not be wrong.” This mysterious sentence, it seems, referred to those bankers who worried that their institutions would not receive the money owed by the municipalities in full. Like Greece’s private creditors in 2011, they feared they would have to take a haircut.
A week or so after the announcement reporters learned from various Fidesz sources that the Orbán government was willing to pay only a portion of the debt. Some sources came up with a 10-15% haircut; others talked about 20-25%.
As it turned out, the worst offenders were large Fidesz-led municipalities like Hódmezővásárhely under János Lázár, Debrecen where Lajos Kósa has been the mayor forever, and Budapest’s fifth district, Antal Rogán’s turf. I understand that Orbán while in opposition encouraged the Fidesz-led cities to borrow in order to prove how much more effective Fidesz was at the local level than the socialists had been previously. In the case of Hódmezővásárhely the situation became so bad that in January 2012 Lázár practically threatened the CEO of Erste Bank that either he lets his city off the hook or else. The CEO, Jelasity Radovan, wasn’t frightened and told Lázár off. But now the “barber in chief” is taking over, and the Hungarian banking community is not strong enough to resist on its own. The bankers need help, which seems to be forthcoming from the international financial community.
A few days after Orbán’s speech István Horváth, an economist, wrote an article in Portfolio about the dangers of assuming this debt and not paying the banks back in full, as all communications after the speech indicated was the plan. In this case Hungary could end up like Greece. Although it arrived at an agreement with the lending institutions, it was still considered to be “in default.” This would be the situation with Hungary as well. Clear as anything, and it’s unfathomable to me that the “experts” of the Orbán government didn’t understand the consequences of the October 27 announcement.
Today the government spokesman, András Giró-Szász, set out to calm nerves. He said something about continued negotiations with the banks and suggested that it would be a great deal better if there was no unsupported speculation about their outcome. When reporters inquired about the warning from one of the credit agencies, they didn’t receive a straightforward answer.
What kinds of options does the Hungarian government have under these circumstances? Apparently, the indebtedness on the municipal level was so horrific that the government had to assume at least part of their debts. Now that the Orbán government is stranded with the debt it can try to pay it back in full. That would be the decent thing to do, but the government itself is strapped for funds. There are other approaches the Orbán government could try. One is to get out of the deal and throw the problem back to the banks and the municipalities. Maybe on an individual basis the lending institutions and the towns could come to some kind of an understanding. I doubt that the banks would agree to that kind of an arrangement. Another possibility is that the government will try to work out a deal with the banks to lower the interest rate on these municipal loans. Whether the banks will be willing to oblige after all they have had to endure as a result of the Orbán government’s policies I have no idea.
I’m sure that Matolcsy’s ministry and the prime minister’s office are madly looking for a solution that will appease the banks and the credit rating agencies without breaking their own piggy bank. I await their latest act of financial creativity.