bank reserves

Viktor Orbán’s grandiose plans might be thwarted by Strasbourg and Brussels

The bureaucrats, speculators, and foreign press are once again lining up against the Hungarian government.

Let’s start with the forint, which today breached the 300 mark against the euro. The forint’s weakness is the result of several factors: the appointment of György Matolcsy as chairman of the Hungarian National Bank; rumors about the possible exchange of some of the bank’s foreign reserves for rubles; and, the latest, word that the government intends “to assist” Hungarians with their foreign currency loans. The government would convert these loans into ones denominated in forints and would also lighten their burden by paying a certain percentage of their debt. The Hungarian government would use some of the reserves of the Hungarian National Bank for this purpose.

There are political pressures on the Orbán government as well. In the March 5 issue of the Frankfurter Allgemeine Zeitung Michael Link, undersecretary in the German Foreign Ministry, wrote a piece that appeared on the op/ed page of the newspaper and available on the website of the German Foreign Ministry or in Hungarian on the Galamus site. The title itself is telling: “Hungary must remain a country of the law.” In the body of the article Link reasserts that “we cannot be indifferent” to what is happening in Hungary. Earlier the European Commission managed to convince the Hungarian government to change some passages in the Constitution. The Hungarian Constitutional Court also found some of the laws passed by the Hungarian Parliament to be unconstitutional. Now, however, there are new attempts to smuggle back all the formerly objectionable passages into the body of the constitution. These “new initiatives limit the freedom of expression for the alleged protection of the dignity of the Hungarian nation.”

rule of lawAs a friend of Hungary, Link would like Hungary “to demonstrate that the country has an effective separation of power between the legislative and the judicial” branches. As it stands, the Constitutional Court hands down judgments that the government ignores. “We need a vibrant parliament with a perceptible opposition and a confident Constitutional Court.” Link also wishes that “the two-thirds majority the Government relies on is used prudently. A two-thirds majority is not a free ride…. The European values that we share in the world, we must also cherish at home.” For good measure Link mentioned that Foreign Minister Guido Westerwelle shares these concerns. Common European values “must apply to all EU members, both new and old.” As with each member state Hungary remains “master of its cultural identity,” but there have to be shared values. Among them the rule of law is the most central. “It must be able to develop without any ifs, and, or buts.”

The Hungarian answer that came from Gergely Gulyás, a young Fidesz MP and a member of the parliamentary committee on constitutional matters, was that “it is a misunderstanding” that the Hungarian government wants to limit the competence of the Constitutional Court. To the contrary, its latest amendments were made at the request of the Court itself. What else is new? We know from earlier government statements that everybody misunderstands the intentions of the Hungarian government and Viktor Orbán.

On the very same day the Financial Times came out with an editorial on “Orbán’s threat to democratic values.” It is about the same amendments Michael Link was talking about. The article reminds people that last year Viktor Orbán backed down on aspects of a new constitution that would have posed a threat to judicial, religious, and press freedoms. But this week the Hungarian parliament threatened to revive “curbs that violate European values in an amendment to the constitution. If this goes ahead, the response from Brussels should be rapid and robust.” According to the editorial, Brussels should “set out in precise detail where the amendment violates Hungary’s membership of the EU. But once that is established, it should warn Mr Orbán that it is prepared to use the most powerful weapons in its armoury to defend European values.” The article recalls that the EU was ill equipped thirteen years ago to handle the situation when the Austrian government included a far-right party as a coalition partner. But the editorial stresses that “this time there is greater political consensus that Mr Orbán’s attacks on democratic norms cannot be tolerated.” The FT editors suggest a withdrawal of Hungary’s voting rights and add that “financial sanctions too should be considered…. Faced with an economy in deep recession, and a decline in foreign investment, Mr. Orbán needs the money. Brussels should not hesitate to threaten a withdrawal of structural subsidies, for example, if Mr. Orbán does not call on his party to drop any amendments that violate EU membership. If the Hungarian prime minister insists on flouting European values, he cannot expect Europe’s support.”

And if that weren’t enough, today the secretary general of the Council of Europe called on the Hungarian government to postpone the vote on the latest amendment to the constitution. Thorbjørn Jagland wrote: “I have misgivings concerning the amendments that may not be compatible with the rule of law.”  He further argued that with the incorporation of these amendments the government with its two-thirds majority is forcing its will on the Constitutional Court and is thereby endangering the system of checks and balances. He suggests a postponement of the vote in order for the Venice Commission to study the matter.

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Viktor Orbán’s Russian roulette

Unfortunately the title of this post is not original; it is borrowed from an article in HVG. But it is an apt description of Viktor Orbán’s efforts to make a financial deal with the Russian government. The outlines of the plan can be stitched together from various sources, but not all the information is available yet. However, to me at least, it looks as if the Orbán government’s Russian orientation is nothing new. It was hatched perhaps even before the 2010 elections. It has been carefully worked out.

Today in the early morning edition of Népszava I found an article about a top secret trip of Antal Rogán, the whip of the Fidesz parliamentary delegation, to Moscow. Although the visit took place on February 28, a day before György Matolcsy’s nomination to be the next chairman of the Hungarian National Bank, the Hungarian press didn’t get wind of the trip until today. Rogán met with Sergei Zheleznyak, deputy secretary of the United Russia party’s chief council. 

The information came from the official website of United Russia. Let me quote some of the most important passages describing the meeting. “The Hungarian guests noted that Russia today is their strategic partner…. These days the Hungarian government is considering the possibility of converting some of the Hungarian National Bank’s reserves to rubles because of the precarious situation of the dollar.” In addition, Rogán invited the Russian party chiefs to attend Fidesz’s next congress in June. He expressed his hope that at that time the two parties will sign a document of close cooperation.

As I mentioned, this development is nothing new. It is not a spur of the moment decision. Some of you may recall Viktor Orbán’s much debated meeting with Vladimir Putin in November 2009 at the party congress of United Russia. At that time there was a debate about how serious these talks were and what the topic of conversation could have been. The follow-up visit of János Martonyi to Moscow in March 2010, that is before the election, received less attention. Martonyi had dinner with Russian Foreign Minister Sergei Lavrov, but not as the future foreign minister of Hungary but as a representative of Fidesz, the “fraternal party” of United Russia.

Pro-Russian government policyCome home!

Pro-Russian government policy
Come home!

Viktor Orbán’s second trip to Moscow, which took place in early February of this year, was also hotly debated in the Hungarian press where he was described as “Putin’s new little kitten.” A few days later the Hungarian media heard that “Orbán exchanged the IMF for Moscow for 4.6 billion dollars.” HVG reported that Moscow would purchase 4.6 billion dollars worth of Hungarian government bonds at a very low, 2.25% interest rate. The article also said that “sometime in the future the Hungarian government might issue government bonds in rubles.” HVG pointedly asked what Hungary would have to give in exchange for all this.

Yesterday Népszava asked the Hungarian National Bank whether they know anything about converting some of the bank’s reserves into rubles, but naturally the government never bothered to inform the bank officials of such a deal. They were obviously waiting for the arrival of an obliging György Matolcsy because surely András Simor would never have agreed to such a “hazardous game.” The ruble is not fully convertible and is therefore an illiquid currency. Moreover, the exchange rate of the ruble fluctuates wildly. Not exactly qualities one wants in a reserve currency.

The bank officials didn’t know about any of these negotiations but Mihály Varga, the incoming minister of the economy, certainly did. Although during his Napi Gazdaság interview today he claimed that he knew nothing about the negotiations, he admitted that there were talks between Budapest and Moscow. He described them as “inter-party talks” and suggested that the journalist “talk to Mr. Rogán.” But he told Ildikó Csuhaj of Népszabadság that it is a good idea to diversify.

By early afternoon Rogán’s press department confirmed last week’s Moscow trip. Not surprisingly, the spokesman said nothing about the central bank’s reserves and the conversion of dollars or euros to rubles. Fidesz’s official website posted information about “talks concerning economic matters” but couched this news in carefully crafted language that may mask the real intent . The Fidesz communiqué reads: “While discussing economic ties the idea of a ruble-based swap agreement surfaced that would make the mutual financing of Hungarian-Russian trade easier.”

And the original, the famous MDF campaign ad: Comrades, this is the end!

And the original, the famous MDF campaign ad from 1989: Comrades, this is the end!

Gergő Nagy of HVG wrote a fairly lengthy article that contained comments from leading members of the financial community. He is the one who called the plan a hazardous “Russian roulette.” Hazardous because most of Hungary’s financial obligations are in euros and because the ruble is not exactly a favorite of currency traders. On the plus side, however, the yield on Hungary’s euro reserves is close to zero while the interest rate the National Bank pays is between 4 and 5%. That means about a 100-200 billion forint loss a year to the bank which by law the state must replenish. The yield on Russian government bonds is between 5 and 6%, which might begin to close the gap but only at great risk that might not be worth it.

Officials of several financial institutions emphasized that the reference to the instability of the dollar during the Moscow negotiations was nonsense. The dollar is still the world’s number one reserve currency and most likely will remain so for the foreseeable future. Sixty percent of world trade is in dollars. Another bank expert mentioned that one of the goals of the central bank is to create financial stability, which also means the stability of the reserves, and Russia is not a financially stable country. For example, in 1998 the Russian government had to declare bankruptcy.

László Tamás Papp wrote a scathing opinion piece entitled “Rogán, ruble, the ruszkis are coming back.” He recalls the fiercely anti-communist stance of Fidesz throughout the party’s existence, Orbán’s attacks on Ferenc Gyurcsány because allegedly he wanted to make Hungary “the happiest barracks of Gazprom,” and his famous speech in 1989 at the reburial of Imre Nagy in which he demanded the immediate withdrawal of the Soviet troops. And here he is now fawning over former members of the KGB. Now he is offering not only the Hungarian National Bank to the Russians but also the Paks nuclear power plant. The party that made sure that Ronald Reagan has a statue in Budapest is now brown-nosing a former KGB agent and a post-Soviet autocrat. Someone who insists on a yearly memorial to the victims of communism on February 25, the day when Béla Kovács, secretary of the Smallholders Party, was taken to the Gulag in 1947, now praises Putin’s Russia. The whole opinion piece is a passionate outcry against the cynicism of the regime and against the people who tolerate all this without a murmur. He ends his article: “You didn’t like Western capitalism? Now you can find out what the Eastern variety is like. If you let it happen, you deserve whatever the eastern winds blow into your face.”