Hungarian forint

The European Commission is not happy with Hungary’s economic performance

Yesterday the European Commission published a press release after the commission staff concluded its fifth Post-Program Surveillance mission to Hungary. After a few encouraging remarks that welcomed recent economic improvements, the authors of the memo delivered some bad news. The better economic indicators are mostly due to artificial one-off stimuli (a decrease in utility prices, the central bank’s low-interest loan program, the workfare program, and greater use of EU subsidies) and therefore one must be cautious when assessing the state of the Hungarian economy. The report also pointed out that “although the general government deficit has been kept below the 3% of GDP threshold, government debt is not yet on a firm downward path.” Furthermore, it warned that based on the Commission’s 2014 spring forecast, “the country appears at risk of breaching the requirements of the Stability and Growth Pact.” They suggested “additional fiscal consolidation efforts, in order to avoid that an inadequate pace of debt reduction could trigger the re-opening of an excessive deficit procedure in spring 2015.”

That was  not all. The mission stressed the “benefits of pursuing growth-friendly fiscal consolidation.” The mission also called for a  stable and more balanced corporate tax system, including “phasing out distortive sector-specific taxes.” They recommended an improvement of the banks’ operating environment, including a reduction in their tax burden. And finally, “the mission called for improving the business environment and emphasized the need to stabilize the regulatory framework and foster market competition, in particular by removing entry barriers in the service sector.”

All this sounds like reasonable advice. Hungarian economists who are more and more critical of Viktor Orbán’s unorthodox economic policies have been saying the same thing for a number of years, to no avail. And it is unlikely that the Orbán government will heed the European Commission’s advice, especially their call to reduce the tax burden on the banks. Viktor Orbán immediately charged the European Commission with serving the interests of banks and multinational corporations when it threatens Hungary with the excessive deficit procedure.

Banks have it hard in Hungary. Here is one example–András Hámori, a senior executive of the Russian Sberbank Europe AG, gave an interview to Reuters that was later picked up by the Moscow Times. Hámori sees good business opportunities in the Czech Republic and Slovakia as both are expanding markets where taxes on banks are contained. But not so in Hungary where the “regulatory environment posed many challenges, which warranted caution.” He continued: “So when a shareholder decides where to deploy capital he obviously has to look at the potential return, and Hungary here does not rank on top, more like the opposite side.”

In addition to exorbitant tax levies banks also have to cope with the forex-loan problem. Prior to 2008, during the tenure of Zsigmond Járai, the Fidesz appointed governor of the central bank, the interest rate on loans denominated in forints was very high; therefore most people took out loans in foreign currencies, primarily in Swiss francs and in euros. It was a great deal while it lasted, but in the last four or five years the Hungarian forint weakened considerably against both of these currencies, placing a heavy burden on the debtors.

The Hungarian government decided to ease the hardship of those people with foreign-currency loans. With the bill that was recently approved by parliament, the Hungarian government seems to put most of the burden on the banks. According to some estimates this piece of legislation will cost the Hungarian banking sector $4.85 billion. Moreover, it looks as if the banks will have to convert foreign-currency loans to loans in forints.

Over the past week or so the Hungarian forint has fallen from 305 to the euro to 312 today. This weakening stems primarily from the central bank’s cutting interest rates to what some consider “dangerous levels.” In the last two years the interest rate was lowered from 7% to 2.3%, and last week there was talk that the central bank is contemplating at least one further reduction. The forint’s decline only accelerated after the forex bill was submitted to parliament for discussion.

Soource: Politics.hu

Source: Politics.hu

The EU is raising the possibility of reinstating the excessive deficit procedure against Hungary in 2015 because of Hungary’s very high national debt, which has been growing instead of shrinking as the Orbán government promised. This growth is especially glaring if we consider that the government could have reduced the national debt by 10% if it had earmarked for that purpose all of the money it expropriated from the private pension funds of millions of Hungarians. Today there is not one red cent left from this pension money, and it’s unclear what new sources the government can tap to bring down the growing national debt.

Reducing the national debt is especially difficult because the Orbán government is a profligate spender. They are especially keen on nationalizing private businesses. Moreover, beginning this year Hungary will have to pay interest on the 10 billion dollar loan from Russia although the actual building of the reactor will not begin for years. That will add considerably to the national debt.

All in all, I am almost certain that the country’s finances are in a shambles. However, Mihály Varga excludes any possibility of any excessive deficit procedure (szó sincs túlzottdefecit-eljárásról). He admitted that “Hungary probably will have to introduce further financial consolidation in order to lower the national debt.” I will be curious to see who’s next on the hit list.

The population hears only about the economic growth Hungary has achieved in the last few months and the higher GDP than earlier anticipated; they have no clue about how fragile the Hungarian economy really is. One could counter: “Well, just think how many times in the past four years critics of the Orbán government have predicted that the whole economic edifice Viktor Orbán and his right-hand man György Matolcsy built will collapse. And look, nothing of the sort happened.” Indeed, until now they were lucky, but how long will that luck last? There will be a day of reckoning, I believe. Mind you, they might manage to keep the country afloat just long enough to make the day of reckoning a problem for their successors.

Advertisements

György Matolcsy and Goldman Sachs: November 17, 2011

Exactly a month ago I wrote a post about Helga Wiedermann’s forthcoming book under the title “‘Secrets revealed’: Memoirs about the financial attacks on Hungary.” Wiedermann, about whom nobody knew much, turned out to be György Matolcsy’s chief-of-staff when he was minister of national economy. At the time I had to rely on a fairly lengthy excerpt from the book that appeared in Magyar Nemzet because the book was set to be released only about three weeks later. The excerpt concentrated on the heroic work of Matolcsy against bankers, speculators, and western politicians who wanted to see Hungary in ruins and Viktor Orbán toppled. Since then the book has reached bookstores, and now the talk is about something else: the incompetence and irresponsibility of György Matolcsy.

So, what happened? Chess and Poker: Chronicle of the Victorious Battles of the Hungarian Economic War of Independence was released with great fanfare on March 11. Present at the book signing were Viktor Orbán and György Matolcsy as well as members of the Monetary Council. We learned that the idea of writing a book about Hungary’s economic battles came from Viktor Orbán himself. He thought that the Hungarian people should know more about the heroic efforts “we undertook together in defense of the country.” György Barcza, who used to be a respected financial analyst at ING Bank, today is the editor-in-chief of Napi Gazdaság, recently acquired by Századvég, an economic and political think tank close to the government. At the book signing Barcza hailed Chess and Poker as a reference book on how a government should negotiate with the IMF. He emphasized the importance of “economic independence” and cited Turkey and Russia as good examples.

But after the high-profile book launch people went home and actually read the book. And this is where the troubles started. It didn’t take long to discover that one of the leaders of Hungary’s war of economic independence committed a serious indiscretion if not a criminal act. On November 17, 2011, four hours before the Hungarian government’s official announcement that it had after all decided to turn to the IMF for a loan, Matolcsy had lunch with three representatives of Goldman Sachs. He told them that in the morning the Hungarian government had approached the IMF for a loan. According to the detailed description of Wiedermann, one of the three visitors immediately excused himself to go to the rest room, not to relieve himself but presumably to inform, directly or indirectly, Goldman’s forex trading desk of this piece of news. The lunch, Wiedermann recounts, was unusually short. The guys from Goldman had gotten their inside information and presumably had more follow-up work to do.

The EUR/HUF chart from that day shows the immediate buying pressure after Matolcsy’s indiscretion. When the official announcement was made at 3:52, forex traders not privy to its early “release” piled on. There were thus two waves of buying, with the early buyers having a decided advantage.

Matolcsy, who a couple of days earlier had been praising the book as an accurate chronicle of events, found himself in an uncomfortable position. He changed his tune and now claimed that “Helga Wiedermann wrote nothing but fiction in her economic novel. Naturally the head of the National Economic Ministry did not inform the investors about Hungary’s plans concerning the IMF. Instead he told them that this was one of the possible options.” This is pretty much of an admission as far as I’m concerned.

There are many questions one can pose in connection with this sorry affair. In my post a month ago I set forth the possibility that György Matolcsy himself may have written the book, at least in part. After all, Helga Wiedermann was not present at many of the meetings she talks about in detail. But whatever Matolcsy’s role in writing the book, I think one can be certain that he read the manuscript before it went to press. The scene at the restaurant with the Goldman Sachs people is quite detailed:

After ordering, Matolcsy mentioned in passing that at 8 a.m. he had informed the IMF delegation that Hungary is beginning negotiations with the International Monetary Fund and the European Union. Moreover, we already sent the letter to Washington and Brussels. The butter knives froze in the hands of the guests. One of the guests immediately said that he was in need of a restroom and got up. It is not known how many telephone calls he made, but after he returned they finished lunch in record time. Instead of the normal one and a half hours, they finished all the courses in 40-50 minutes.

After this meeting Matolcsy became convinced that all the paranoid rumors were true: the big international investors had launched a life threatening attack against Hungary. What can one say after reading this? Is Matolcsy that ignorant of the financial world in which he is supposed to operate? From the description this seems to be the case, because the message is that Matolcsy thought he had tricked the men from Goldman Sachs into revealing the true intentions of the entire international financial world toward Hungary. This really boggles the mind.

The guys from Goldman did what any smart employee would have done: having received information about an official move of the Hungarian government that hadn’t yet been made public, they rushed to tell their friends in London and/or New York that it was time to buy the forint. There is nothing sinister about this. As Boris Schlossberg, managing director of FX Strategy for BK Asset Management, said, “If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan, tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like.” This is not illegal; there is no such thing as insider trading in the forex market. Moreover, in this case Goldman Sachs’s purchase of forints was not an “attack” on Hungary. In fact, it helped to strengthen the Hungarian currency, which was to the advantage of the Hungarian government.

I think we can safely say that Hungary had an economics minister and today has a governor of its central bank who not only is unqualified but talks too much. Until the news was officially released, it was a state secret which you don’t talk about to anyone, especially not to representatives of Goldman Sachs.

News travels fast nowadays and yesterday at a press briefing by Gerry Rice, director of communications for the International Monetary Fund in Washington, a reporter asked him about this affair.

QUESTIONER: On Hungary, this is kind of a book that came out this week saying that the previous economy minister spoke to Goldman Sachs before making public that it was going to the IMF for a program, and that this resulted in currency trading that some people, rightly or wrongly, are attributing to this sort of speaking in advance to an investment bank. So it just made me want to ask you whether the IMF — obviously there’s Hungarian legal issues that exist or don’t– have any rules on the ministers and governments that it speaks with how they should convey that information? Either if they could trade on it, for example, or if they can convey it to others and then in turn could trade on it?

MR. RICE: I don’t have any information at all on the case you’re referring to, so I don’t have any comment on that. But we do have, of course, confidentiality understandings on information that we would consider confidential in the discussions that we undertake with any authority.

Although the opposition wants to see Matolcsy resign, nothing of the sort will happen. Especially since it would be the task of the governor of the central bank, György Matolcsy, to investigate the case of György Matolcsy, the minister of national economy. The oddity of the whole situation is well illustrated by the fact that the denial of the particulars of the affair came from the Hungarian National Bank, which had nothing to do with it.