IMF delegation’s report on the economic health of Hungary in 2012

The IMF delegation was back in Budapest, but the visit was not part of the non-existent official negotiations between the International Monetary Fund and the Hungarian government. It was simply a routine examination of the Hungarian economy. Every six months, according to an agreement signed after Hungary received a substantial loan from the IMF, the officials of the Fund have the right to assess the financial well-being of the country.

The delegation arrived on January 16 to look over the balance sheet of 2012 and to suggest steps to correct perceived mistakes in the economic governance of Hungary. Mihály Varga, the man in charge of the non-existent negotiations, told the press that “all talks with the IMF are after all about the loan guarantee Hungary would like to receive.” The Orbán government wants to have a financial arrangement that would allow them to pursue their uniquely Hungarian economic policies without anyone looking over their shoulder. They sure don’t want to have those pesky IMF officials poking around.

IMF-Hungarian government negotiations, January 16, 2012Photo László Beliczy / MTI

IMF-Hungarian government negotiations, January 16, 2012
Photo László Beliczy / MTI

Mihály Varga simply doesn’t understand why the IMF is reluctant to extend a loan guarantee to Hungary without no strings attached when, according to him, everything is swinging. The deficit is low, the government bonds sell well, the price of their credit default swaps is reasonable, and the Hungarian economy is stable. But, it seems, the IMF sees all this very differently.

The unofficial negotiations continued off and on throughout the two weeks the delegation spent in Hungary. For Varga the question was “whether the IMF is willing to accept Hungary’s current model of economic policy as the basis of negotiations or it insists that we change the structure of our economic governance.” The answer came on January 28. The IMF does not accept György Matolcsy’s unorthodox economic model, and it insists on a different course of action. If Hungary does not comply, there can be no question of a loan. Forget about a guarantee.

It is unnecessary to summarize the contents of the fairly lengthy IMF report here. It can be found on the IMF website. The gist of  the report is that “a new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence, repair the financial sector, and promote structural reforms to boost the potential of the Hungarian economy.”

The weak performance of the Hungarian economy is due both to structural factors and to specific domestic policies. The IMF doesn’t share the Hungarian government’s claim that Hungary’s problems are due solely to the weak performance of the European Union as a whole. The report argues that the “increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity. This contributed to a negative feedback loop between slow growth, weak investment, bank disintermediation, and high public debt.”

If the current policies are continued, the IMF report predicts, the general government deficit will increase in 2013-15. The IMF, like most Hungarian economists, predicts that there will be revenue shortfalls. As a result, the deficit will be above the maximum 3% necessary to exit the European Union’s Excessive Deficit Procedure.

In addition, the IMF delegation was deeply concerned about Hungary’s potential growth. They predicted that growth, if there is any at all, will be in the 1.0-1.5% range in the next two years. In order to foster growth the IMF would like to see “increased policy predictability, a level playing field for all businesses, and structural reforms.”

The Ministry of National Economy immediately reacted to the IMF, but it was as brief as possible. It simply stated that according to the government the “Hungarian economy in fact is in a much better situation than is portrayed in the IMF’s report.” Moreover, “the steps taken by the government are not ad hoc but will remain permanent features of the system.” Well, if this is true, the Hungarian economy will be unlikely to recover in the medium term.

The government’s take on the country’s economy is optimistic, and the ministry of national economy contradicts the IMF assessment on several points. For example, they do not admit that government policies contributed to the recession. In a report of its own, the ministry blames the problems on outside factors: recession in the euro-zone, the drought that produced a poor harvest, and the economic decline of several foreign businesses (Nokia, Flextronics, for example). Otherwise, they list a number of reforms the ministry considers “structural.” Among them, taxation, changes in education, healthcare, pensions, public transportation, and solving the problem of municipal indebtedness. The document can be read in its entirety on the government’s website.

Mihály Varga tried to shift the blame for the sluggish Hungarian economy to the European Union. After all, Hungary was forced by the EU to lower the deficit and to put into place austerity measures that resulted in economic contraction. He also insists on continuing the exorbitant tax levies on banks that has further stifled economic growth because of the lack of credit from banks that can barely keep their heads above water.

In contrast, most of the media described the IMF report as “devastating.” HVG emphasized the real possibility that because the IMF-EU delegation predicts a higher than 3% deficit  Hungary might remain under Excessive Deficit Procedure. That would be very bad news for Hungary. I assume that one of the topics José Manuel Barroso and Viktor Orbán will discuss in Brussels tomorrow will be the delegation’s critical remarks about Hungary’s economic policies.

On the right, the economist György Barcza, who used to work for ING Bank (2001-2012) but moved over to the pro-Fidesz Századvég last November, was the first one to raise his voice against the IMF’s critical report. He claimed that “the IMF didn’t dare tell the truth.” The members of the delegation criticized but did not say what remedies the Hungarian government should implement.  Barcza claimed that if the tax levies on banks and on international companies were lifted the budget would lose about 800 billion forints. In order to make up this sum the government would have to take drastic measures. It would have to introduce a 0.5% property tax. The tax rate for those who earn more than 4 million forints per year would be 50%. In addition, the government would have to stop the generous tax rebate to which families with three or more children are entitled.

Well, I’m no economist but I have other ideas that might solve the problem of the missing 800 billion. For example, the government could sell its MOL stock for which they spent billions, not in forints but in euros. I would suggest getting rid of the recently purchased shares in Rába. They shouldn’t have spent billions on a Hungarian-language university in Romania.  They shouldn’t have spent 13-14 billion forints on TEK (Terror Elhárítási Központ). It was really not necessary to spend 2-3 billion on a 400-member guard for the parliament. They shouldn’t be spending billions on recruiting voters abroad. Hungary doesn’t need several new football stadiums, each costing 10-20 billion forints.  And what about taking over the loans of municipalities that under Fidesz leadership piled up debts they can’t pay? I’ll bet that one could easily make up those missing 800 billion forints.


  1. @Paul: Hah, investors with good track record blow up all the time…I’m sure they have made a calculated decision, but I do believe that they underestimated the political risks in Hungary. Also, you are right that as they are professional investors, they diversified the portfolio in a way that one bet blowing up won’t ruin everything.

  2. An :
    I’m sure they have made a calculated decision, but I do believe that they underestimated the political risks in Hungary.

    “We like those which everyone hates, and Hungary fits that bill.”
    – Michael Hasenstab, manager of the Templeton Global Bond Fund

    They bought 10-year notes. So simply put, they believe they get their money until in 2022. They believe that if Orban stays, he will beat out the money from the people, even if 1/3 dies from hunger. If Orban looses a sane government will float on until 2022 on an IMF bailout. Depressing.

  3. Minusio :
    @ Mutt. Nice and plausible scenario!

    I guess it would be considered nice in North Korea and places like that, where people are used to getting things beaten out of them, still better than being executed.

  4. @ gdfxx. Right, still better than being executed. And then what? What other differences do you see – futurewise – when you look at North Korea or Belarus or the Ukraine?

  5. Minusio :
    @ Mutt. Nice and plausible scenario!

    They didn’t mean terror. Rather the beaten horse is the analogy here.

    They are betting on our nation’s genuine stupidity. They looked at the peace march – hundreds of thousands, mostly old farts, marching for their own tormentor. Then the Templeton guys went: “Great! These guys will buy all the freedom fight bullshit for at least 10 years and give up half their pension for Orban! Buy more short term Hungarian bonds!”.

    Our stupidity and laziness is our most valuable commodity. For Templeton at least.

    I’m thinking Matolcsy here … we should capitalize on this abundant source of cluelessness. It should make US rich! Let’s buy our own bonds!

  6. This is all so depressing!

    The only political highlight today – at least for me:

    Just saw a report on the meeting between Putin and Orbán and after complaining about the newsman’s “bla, bla, bla” my wife suddenly called out:

    Look at those two Napoleons – Putin is even smaller than Orbán!

    I almost spilled my beer …

  7. Mutt :

    An :
    I’m sure they have made a calculated decision, but I do believe that they underestimated the political risks in Hungary.

    “We like those which everyone hates, and Hungary fits that bill.”
    – Michael Hasenstab, manager of the Templeton Global Bond Fund

    They bought 10-year notes. So simply put, they believe they get their money until in 2022. They believe that if Orban stays, he will beat out the money from the people, even if 1/3 dies from hunger. If Orban looses a sane government will float on until 2022 on an IMF bailout. Depressing.

    I fear you are spot on, Mutt.

    None of it matters to them – the bottom line is all that counts.

  8. Paul,
    was this meant as a compliment ?

    Actually I’ve been fascinated with Britain (and the USA) since I was a teenager and visited as often as I could (afford it) – maybe it runs in the family, one of my sisters married an Englishman …

  9. I was just being ironic, Wolfi, considering we’re all Germans – just that we’ve simplified the language quite a bit…

    I regret I’ve never been to Germany, other than being stuck in an airport once on the way home from Hungary (snow at Heathrow…). I can’t even remember which airport, I’m afraid. My dad was over there for a while during his national service and made a lot of German friends (although that was only a few years after the war, so he was regarded with some suspicion when his friends visited). I was given some lederhosen by one of them – I remember how stiff and uncomfortbale they were!

    Dad also spent a fair amount of time over there when he worked for Fords in the 70s and 80s. He always used to moan that German manufacturing precision wasn’t good enough as he was used to working in thousands of an inch and they were metric – not often you hear German engineering compared unfavourably to British!

    Unfortunately, my dad died recently, so he only got to make one trip over to Hungary, but I shall always remember him trying to talk to my father-in-law – both of them were convinced that they spoke German, but neither could understand the other!

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