Hungarian National Bank

The first state-owned Hungarian bank is already in trouble

Great interest preceded a press conference held jointly by Prime Minister Viktor Orbán and György Matolcsy, governor of the Hungarian National Bank (HNB), this morning. What was so important that these two men would have to appear together in public? It had to be something momentous. Well, it was. The newly “nationalized” Magyar Külkereskedemi Bank (MKB) is in serious trouble and the Hungarian National Bank will assume ownership of it and prop it up.

But let’s start at the beginning. The owner of MKB was the Bayerische Landesbank, a Bavarian state-owned bank, which according to a 2012 decision of the European Commission had to give up ownership of its Hungarian affiliate. That decision was in accord with the Orbán government’s wishes because it is Viktor Orbán’s belief that the majority of banks in Hungary must be in Hungarian hands. Negotiations began back in 2012, but the two sides couldn’t agree on a price. At that point the Hungarian government was offering 100 million euros, which BayernLB found unacceptably low because shortly before the Bavarian bank had to sink 300 billion forints into its Hungarian affiliate. Well, by the summer of 2014 MKB was in the red, so the Hungarian government managed to buy the bank for 55 million euros. Moreover, the Bayerische Landesbank was obligated to give another 270 million euros to MKB. This money was considered to be sufficient to cover possible losses over the next few months. At that point government officials were sure that the bank would be profitable by 2016 “at the latest.” They added that the new owner, i.e. the Hungarian state, would not need to provide any additional capital and therefore “the reorganization of MKB will not burden either the state or the taxpayers.” Three months later we learn that MKB’s finances are most likely in shambles.

What happened between September and December? According to one theory, MKB’s troubles are the result of the government decision to force banks to exchange all mortgages in foreign currencies for forint-based ones. That means a hit of about 25% to the banks’ outstanding mortgages. Of course, all banks will incur losses as a result of this government decision, but the private banks will have to take care of their losses themselves. Presumably they have sufficient reserves. In the case of the newly nationalized MKB, on the other hand, it will be the Hungarian government’s problem. And since the Hungarian government’s coffers are pretty much empty, Viktor Orbán turned to Matolcsy and most likely forced him to come up with 300 billion forints to save MKB.

bailout

This rather unusual step was naturally presented to the public in the best light possible. Instead of telling the truth about the financial troubles of the newly acquired bank, the Hungarian public was told that “the government and the Hungarian National Bank agree that [MKB] must become one of the strongest banks of the country.” Thus they implied that the 300 billion forints was not being spent to save the bank from collapse but was necessary seed money to make this bank the best in Hungary. Viktor Orbán stressed that since “the consolidation of MKB will be done by the Hungarian National Bank it will not cost anything to the budget or the Hungarian taxpayers.” Of course, this is a brazen lie because money at the Hungarian central bank is in fact public money.

According to napi.hu, an internet site formed by former journalists of Napi Gazdaság after it was purchased by Századvég, one reason for passing the bank bailout on to the HNB is that this way the government can avoid parliamentary oversight. That may be, but it is unlikely. Orbán does not have to worry about the parliament and its alleged oversight. However, Napi.hu is most likely right when it finds the whole story suspect. After all, before the purchase it was the National Bank that vetted the bank and found everything in order. On the other hand, János Lázár in an interview that appeared in today’s Figyelő contends that MKB was a badly run bank that was “stolen blind” by unnamed persons. Matolcsy now claims that even before the purchase the Hungarian government was aware that the bank’s portfolio “will have to be cleaned.” So, which is the true description of the bank’s financial health? Is it possible that by exaggerating MKB’s losses more money can be siphoned off from the MNB’s reserves for something other than the “consolidation” of MKB?

Both men emphasized the “reorganization” aspect of the deal and said practically nothing about the bank’s financial troubles. They painted a rosy picture of the bank, which after “a 12-18 month reorganization period will be the best bank of our country.” Here Matolcsy admitted that although the bank has an excellent clientele, the percentage of non-performing mortgages is very high. But once the problems are solved MKB will be the “first fair bank” of the country. There has been a lot of talk lately about “fair banks,” which would function under more stringent scrutiny that would provide better protection to consumers.

The Hungarian National Bank announced today’s decision in the following terms: “Following the decisions by the Financial Stability Board, the MNB [Magyar Nemzeti Bank/Hungarian National Bank] has today taken control over MKB Bank and will reorganize the credit institution, including its subsidiaries.” It is worth noting that the press release emphasizes that “the move has taken place within the legal framework provided by European Union Directives and its responsibilities under Hungarian law.” Or again, a little later: “In accordance with European Union Directives and harmonized Hungarian regulations, the MNB will retain control over MKB Group temporarily (probably for a period of maximum one year).” I always become a tad suspicious when I hear from Hungarian officials that the move they just made is in accordance with EU laws. It usually turns out that it is not.

And what is the long-term future of this new nationalized bank? After the state sinks billions of taxpayer money into it, they plan to privatize it. Most likely on the cheap to friends of Fidesz.

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The Hungarian central bank goes on a buying binge

It was on August 3 that I first read about the so-called Borbély castle in Tiszaroff. It was refurbished after the change of regime and was owned by a German businessman who made a four-star luxury hotel out of it. In the wake of the recent downturn in the economy, however, the business failed, and the owners put the property up for sale. The article I read in Vasárnapi Hírek reported on rumors circulating in the village that the Hungarian National Bank had purchased the castle for use as a vacation resort for the central bank’s employees. And indeed, a week later it became official. The bank purchased the property for €1.3 million (415 millon HUF).

Kester Eddy, a reporter for the Financial Times, had a great time writing a story about the purchase. It reminded him of the days when, under communism, state companies and institutions owned holiday properties so their employees could spend two weeks splashing around in Lake Balaton. The bank struck back and explained that “the Magyar Nemzeti Bank, like other EU central banks, seeks to provide its more than one thousand employees with fringe benefits.” Moreover, the castle-hotel is located in the country’s least developed region and by opening the hotel again “more than 30 new jobs have been created.” Between May and the end of August it will function as a recreational center and between September and April as a training center.

The Borbély Castle-Hotel in Tiszaroff on 3.5 hectares

The Borbély Castle-Hotel in Tiszaroff on 3.5 hectares

Earlier the Hungarian National Bank had seven different vacation homes, but by 2009 the bank sold them off one by one. In these still difficult economic times it is hard to justify buying a luxury hotel even if the price was apparently attractive. The owners asked 680 million forints for it, but the bank managed to purchase it for a mere 415 million. Moreover, Matolcsy pointed out that the bank had earned a profit of 26.3 billion forints and therefore the purchase did not cost taxpayers a penny. An interesting explanation from a central banker.

The brouhaha over the purchase of the castle-hotel had barely died down when HVG learned that the Hungarian National Bank also bought perhaps the most expensive office building in Budapest, the eight-story Eiffel Palace. Originally it was rumored that some of the offices of the central bank would be moving into the building. Portfolio thought that purchasing a class A office building was an acceptable business concept. Others were less sanguine. For example, the popular blogger orulunkvincent.hu. According to him, the price was €57.5 million (18 billion forints) and the building has 14,000 square meters of rentable space. In calculating the potential return on this investment he assumed the top rental rate for space in a green building, €13.5 per square meter. In downtown Pest 86% of the available office spaces are occupied. If the Eiffel Palace has the same occupancy rate its gross annual rental income would be €1,950,480. Assuming an 80% profit and 10% tax, the net rental income would be €1,404,346 per year. That means a return of 2.44%. Five-year government bonds have an interest rate of 4.70%. So, says the blogger, this deal does not sound so fantastic to him.

According to critics of the deal, the Hungarian National Bank grossly overpaid the owners of the Eiffel Palace. They paid almost 18 billion forints when according to real estate assessors it is not worth more than 11-12 billion. E-PM will go to court in connection with the purchase of the office building because it suspects malfeasance or a breach of fiduciary responsibility on the part of the central bank.

But these two purchases were nothing compared to yesterday’s revelation. HVG learned that the central bank had transferred 200 billion Hungarian forints to its five foundations named after Pallas Athena, the goddess of wisdom, courage, inspiration, civilization, law and justice, just warfare, mathematics, strength, strategy, the arts, crafts, and skill. A perfect description of Hungary today!  This amount is one and a half times more than the Hungarian government spends a year on higher education.

Initially it was known only that this money will be spent on education. Today the central bank released details of its project. “We are creating a faculty of economics and finance at Kecskemét College, a faculty of finance in Marosvásárhely/Târgu Mureș (Romania), a doctoral school in the Buda Castle, and an intermediate financial training center in Pest.” The reason? “The already obsolete doctrines and mistakes of the neo-liberal school of economics continue to dominate Hungarian education in economics and finance.” Since Matolcsy thinks that mainstream economists in the country–and that means practically all respected experts–are wrong and since he cannot get rid of them, he will build parallel economics departments that will teach his unorthodox economic theories. Just as the Orbán government needs an alternative Holocaust Museum and an alternative academy of artists it also needs a new set of economists who will be the high priests of unorthodoxy.

Matolcsy admitted that it will be an expensive undertaking because, after all, they need “new institutions, professors of new vision, and new teaching materials.” Creating new institutions will probably be the least of Matolcsy’s problems. Where will he find those professors of new vision? Where is he going to find new teaching materials? Perhaps he is planning to write them himself because I can’t believe that any self-respecting economist would be willing to write textbooks acceptable to Matolcsy.

I tried to find out more about the institutions mentioned and, as far as I can see, only two seem to exist. The Kecskeméti Főiskola at the moment does not teach economics. It has one section that produces elementary school teachers, another where they teach information science, and another that specializes in what Hungarians call “kertészmérnöki kar”–less elegantly put, gardening and landscaping. This college was established in 2000, i.e. during the first Orbán administration. The second institution, in Marosvásárhely/Târgu Mureș, is not mentioned by name, but I guess it is the Sapentia Hungarian University which was established in 2001 and heavily subsidized by the Hungarian government. I remember that shortly after the 2010 election Viktor Orbán made a trip to Târgu Mureș and gave a billion forints to the institution. As for the others, I assume they will be established sometime in the future.

I used to think that I could not be surprised by anything that is done by this administration, yet I am surprised time and again. It is really frightening how much power is in the hands of people whose sense of reality is greatly impaired.

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.

Vicious attacks on critics of the Orbán government: George Kopits and Kim Scheppele

I’m in trouble again. I don’t know where to start because in the last three days an incredible amount of news emerged from the turbulence of Hungarian political life.

But perhaps I should first say a few words about topics we’ve already covered but thanks to the Hungarian penchant for not letting sleeping dogs lie remain in the news. This compulsion on the part of the Hungarian government to answer every criticism usually works against them.  To take but a single instance of how counterproductive these constant counterattacks can be, consider the case of the German children’s show on the Kinder Kanal (KiKa) about the Orbán government’s attitude toward democratic rights. There is no need to describe the details of the case, but the Orbán government took this “affront” so seriously that Viktor Orbán himself felt it necessary to tell the Germans off about “brainwashing” German children. The result? Another cartoon, this time showing Viktor Orbán dressed up as a clown stomping his feet and threatening his critics. Did Hungary need this? Certainly not. And did HírTV, a pro-government television station, have to respond with a primitive cartoon of its own about Angela Merkel who can do anything because Germany has a lot of money? Again, certainly not. In fact, it would have been best to have said nothing.

Well, something similar is going on at the moment but on a much more serious level. The Hungarian government has taken offense at criticisms from sources a bit higher up than a kiddie show in Germany.

In the first instance, the Hungarian National Bank’s new deputy governor decided to write a letter to the editor of The Wall Street Journal in connection with an opinion piece published in the newspaper by George (György) Kopits, former chairman of Hungary’s Fiscal Council between 2009 and 2011. I wrote about this hard-hitting letter in which Kopits called Viktor Orbán’s newly constructed regime “a constitutional mob rule.”

Newspapers normally give a government or important state institution the opportunity to answer any article it finds objectionable. So The Wall Street Journal had to publish at least part of Ádám Balog’s letter to the editor. Balog, a thirty-two-year-old with no banking experience, gained the favor of his boss in the Ministry of the Economy from where he followed György Matolcsy straight to the Hungarian National Bank. Now, it seems, he’s the bank’s “hit man.”

A very short letter appeared only in the European edition of the paper although Kopits’s piece appeared in the American edition as well. Let me quote the text that The Wall Street Journal decided to publish:

In his recent op-ed, George Kopits urges action against Hungary by international financial markets and the European Union (“Constitutional Mob Rule in Hungary,” March 28). Mr. Kopits criticizes the operations of Hungary’s central bank in particular.

The operation of the National Bank of Hungary is lawful and transparent, contrary to Mr. Kopits’s claims. Under the leadership of new governor Gyorgy Matolcsy, the central bank has replaced an essentially one-person management system with a system based on a broader foundation. During this transition, the turnover in the central bank’s staff, including managers and subordinates, was less than 4%. That means that essentially the same people work at the Hungarian central bank as before.

The real threat to the authority and professionalism of the central bank lies not in such changes to management, but rather in criticisms, like Mr. Kopits’s, that are not supported by facts.

Adam BalogDeputy Governor / National Bank of Hungary

That was published on April 2. Obviously, the leadership of the Hungarian National Bank was dissatisfied with the excised version of Balog’s letter to the editor. They decided to make public the original, which was full of ad hominem attacks against Mr. Kopits.

Here is the original version:

Gyorgy Kopits’s outlash harmful for the interests of Hungary

A discredited person criticizes the Hungarian central bank in the international press

Gyorgy Kopits, a former member of the National Bank of Hungary’s Monetary Policy Council has urged action from international financial markets and the European Union against Hungary. Mr. Kopits heavily criticized Hungary, and the operations of the central bank in particular, in the editorial section of the Wall Street Journal on March 27.

American readers may not be familiar with Mr. Kopits’s career in Budapest. He was a member of the Monetary Policy Council of the National Bank of Hungary between 2004 and 2009. He received the request to fill that post from Zsigmond Jarai, who was finance minister in the first government of the current Prime Minister Viktor Orban, who Mr. Kopits furiously criticized in his article, and then was appointed by the same government to the post of central bank governor.

Mr. Kopits held his position in the Monetary Policy Council, the top decision-making body of the central bank, in a period when lending in foreign currencies was on the rise. Foreign currency loans continue to place a major burden on tens of thousands of Hungarian families and firms to the very day. The National Bank of Hungary is among those that are now making efforts to mitigate the damages, to lower the impact.

Gyorgy Kopits’s criticism of the central bank—while it harms the prestige of the independent central bank—also lacks credibility. As the president of the Fiscal Council, Mr. Kopits approved Hungary’s 2010 budget, in which revenues were significantly over- and expenditures underestimated. Without immediate measures, the budget deficit of the 2010 budget would have been above 7% of gross domestic product as against the originally planned 3.8% of GDP viewed as attainable by Mr. Kopits.

The operations of the National Bank of Hungary are lawful and transparent. The new central bank’s management under the leadership of [new central bank governor] Gyorgy Matolcsy replaced the essentially one-person management system with a system based on a broader foundation in March. Turnover in the central bank’s staff, including managers and subordinates, was less than 4%. That means that essentially the same people work at the Hungarian central bank as before. Not the changes in central bank positions but rather the malicious writings similar to that of Mr. Kopits, which are not supported by facts but are unfounded, are posing a threat to the authority and the professionalism of the central bank.

Ádám Balog, Deputy Governor, Magyar Nemzeti Bank.

Vicious dog / beardenb / flickr

Vicious dog / beardenb / flickr

You will, I’m sure, notice that the English of the original version leaves a lot to be desired. And, instead of answering Kopits’s criticism, Balog hurls personal attacks on him. He is “a discredited person.”  He is ungrateful because he received his post on the Monetary Council of the Hungarian National Bank thanks to Viktor Orbán whom he now “furiously” criticizes. During his tenure on the Monetary Council wrong decisions were made concerning “lending in foreign currencies,” so he is responsible for the current financial problems of hundreds of thousands of Hungarian families and businesses. Kopits not only “harms the prestige of the independent central bank” but “also lacks credibility” because he was “president of the Fiscal Council” that approved the 2010 budget despite the fact that in that budget “revenues were significantly over- and expenditures underestimated.”

Similar personal attacks were launched against Professor Kim Lane Scheppele the other day by Gergely Gulyás, the great Hungarian “expert” on constitutional law. I am almost certain that the letter was not written by Gulyás. The language of the text and its reasoning points to someone who received his legal training in the United States. Moreover, the author of the letter is thoroughly familiar with laws of individual U.S. states which, with due respect to Gergely Gulyás’s wide ranging knowledge of the law, is probably outside the purview of someone who received his law degree at the Catholic Péter Pázmány University in Budapest.

The ad hominem attacks on Professor Scheppele are similar in tone to those Ádám Balog leveled against Kopits, but they are considerably more sophisticated. The document is worth reading in its entirety, but here are a few choice tidbits: “unfounded allegations,” “factual mistakes,” “academic freedom … does not equal freedom from facts,” “egregious mistakes ,” just to mention a few descriptions in the first couple of paragraphs of a fairly long letter. The author of the letter even accuses Professor Scheppele of misleading Paul Krugman who allowed her to use his blog in The New York Times, because if he knew about all the misinformation in her writing Krugman “would surely object to … using him in such ways.” Body blow after body blow.

I can only surmise that the Orbán government came to the conclusion that they crossed the line with the latest amendments to the constitution, which may have grave consequences for Hungary. Therefore, serious critics like Kopits and Scheppele must be discredited. I expect these attacks on critics of the Orbán government to continue unabated.

My suspicion that the Fidesz political elite fears serious countermeasures from the European Union was only reinforced when I heard Viktor Orbán’s Friday morning interview on Magyar Rádió. According to him, Hungary’s economic performance doesn’t warrant the continuation of the excessive deficit procedure, but he expects no fairness in Brussels toward Hungary. The country must be prepared for the possibility that the European Union will not be satisfied with the current figures and the government’s predictions for 2013. Hungary will be punished unfairly.

Critics must be discredited one way or another.  Just as the Austrian paper, Der Standard, said the other day: “Fidesz politicians are bloodthirsty, unscrupulous, and vindictive.”

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.

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.”

No surprise: György Matolcsy will be the new chairman of the Hungarian National Bank

One can only marvel at the speed at which nominations for high positions are approved in Hungary. Early this morning we learned that the inevitable had happened: György Matolcsy was nominated to be the new chairman of the Hungarian National Bank, with his post as head of the Ministry of National Economy to be filled by Mihály Varga. Two or three hours later we heard that the parliamentary committee had found both candidates to be outstanding. On Monday, I’m sure,  the House will confirm them and members of the government parties will stand and rhythmically applaud the excellent job Matolcsy did in ensuring Hungary’s “economic success” in the last three years.

How subtle. The capitons read Greetings to Mr Matolcsy / At last the Hungarian National Bank is in Hungarian handsPhoto falramentaparlament.blog

How subtle! The posters read: Greetings Mr. Matolcsy / At last the Hungarian National Bank is in Hungarian hands
Photo falramentaparlament.blog

Although the final result was never in question, there was some heat during Matolcsy’s confirmation hearing. Even outside of the chamber the MSZP spokesman called Matolcsy a “ridiculous public figure”; inside, members of the opposition questioned Matolcsy’s suitability for the post. Fidesz members of the committee welcomed Matolcsy’s assurance that he plans to pursue a conservative monetary policy. He emphasized his determination to keep inflation in check and promised to stop the spread of bank loans in foreign currencies. On the other hand, Tibor Kovács (MSZP) envisaged a bumpy road for the new chairman because of his reputation. His appointment holds not so hidden dangers for Hungary’s financial stability, he added. Gábor Scheiring (PM = Párbeszéd Magyarországért) also had a few harsh words to say about the appointment of the least successful member of the cabinet to be head of the central bank. MSZP, Jobbik, and independent members voted against him but naturally it didn’t matter.

During the hearing Matolcsy talked a lot about the sins of his predecessor, András Simor. According to him, the Hungarian National Bank didn’t fare well under his six-year stewardship; Matolcsy promised a bright future for the bank over the next six years. Well, we know how much Matolcsy’s predictions and promises are worth. Otherwise, he tried to calm nerves as much as possible and gave the impression of a man who knows his job. The trouble is that Matolcsy really doesn’t have any banking experience. But he sounded, at least on the surface, knowledgeable and responsible with a couple of incomprehensible sentences. He promised to achieve price and financial stability while supporting the government’s economic policies. He added that he will safeguard the independence of the Hungarian National Bank, something a lot of people doubt at the moment, both in Hungary and abroad.

Matolcsy’s nomination and confirmation hearing didn’t roil the currency market. As almost every commentator pointed out, the markets had already priced in Matolcsy’s appointment. But even if the forint didn’t budge, credit default swaps (CDS) did rise. During the month of February they fluctuated between 290 and 305; today they moved up to 310. Not a steep rise but perhaps significant nonetheless. In any case, according to domestic and foreign commentators Matolcsy will be cautious for a while, testing the water before he makes any significant changes in the bank’s policies. But then he will probably stir things up. For example, in the past he talked about the desirability of weakening the Hungarian currency. Peter Attard Montalto of Nomura is convinced, as are most economists and opposition politicians, that the Hungarian National Bank will cease to be an independent institution. Montalto is also certain that Matolcsy will make decisions that may not be beneficial to the Hungarian economy but will further the political goals of Fidesz.

We don’t know yet what will happen to the two vice chairmen. Will they be fired or left in place for the sake of appearance? The two current vice chairmen always voted with the chairman, but since the appointment of five extra members of the monetary council they were consistently in the minority. In the past Viktor Orbán insisted on appointing a third vice chairman, but that plan was thwarted by András Simor and the European Central Bank. Now it seems that a third vice chairman will be appointed after all. Matolcsy handpicked his favorite man from his ministry, Ádám Balog, assistant undersecretary in charge of taxation. Balog was instantly replaced by another government official. So, the appointment of a third vice chairman has been in the works for some time.

Some people jokingly call Matolcsy’s economic theories “esoteric” in the sense that few people understand them. Matolcsy wrote several books that presumably offer some inkling of his thought processes. In the near future I will try to summarize what I can find on the subject. One of his “discoveries” is that “success is sometimes invisible, sometimes incomprehensible, unusual, or at times painful.” Here are few of his ideas: Only people matter and not governments, companies, or financial institutions. What matters is what people believe in, what moves them and how they behave. So, what is important is whether success and accomplishment are associated with us.

These are just a few of Matolcsy’s ideas that one can only hope he will not carry with him to the Hungarian National Bank.