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.

Hungarian public opinion on Viktor Orbán’s “war of independence”

It is an open secret that some leading European politicians worry about adopting too stringent a stance toward the Orbán government in case of a backlash. Their fear, which is fed by the Hungarian government itself, is that too sharp a condemnation of Viktor Orbán and his regime might actually strengthen the prime minister’s hand and at the same time turn the majority of the population against the European Union.

I always thought that such fears were exaggerated. Viktor Orbán has been waging a war of words against the European Union for more than three years by now and, according to the latest polls, more than 50% of the population still think that there is no life for Hungary outside of the European Union. If the hard propaganda of recent years didn’t manage to make a greater dent in the EU’s popularity in Hungary, it is unlikely that a continuation of the same will greatly change the public mood.

Now thanks to Medián, perhaps the most reliable Hungarian polling firm, we have a more detailed description of Hungarian attitudes toward Viktor Orbán’s “war of independence.” Or perhaps one should describe Orbán’s attitude toward the outside world not as a single war of independence but rather as several wars directed against different entities, the European Union being just one of them. Admittedly, perhaps it is the most important target because the Union does have the power, however limited, to have a direct say about the governance of a member country.

Endre Hann, the CEO of Medián, just released a poll taken in June that shows that only 24% of the adult population think that these wars of independence are necessary. Most likely people would find it surprising, given Jobbik’s vehemently anti-Union rhetoric, that only 26% of Jobbik voters consider a war against the Union either necessary or desirable. The majority of Fidesz voters support their leader, but 32% of them still doubt the efficacy of such a strategy. So, says Hann, it is unlikely that this latest assault on the European Union in Strasbourg will translate into more support for Viktor Orbán.

Let’s look at some details of this poll. First, Medián listed seven potential “enemies” of Hungary: the IMF, international financial circles, international credit rating agencies, the European Union, multinational companies operating in Hungary, the United States, and Germany. Among these seven the least popular is the IMF. Almost half of the population (46%) think that Hungary must defend itself from the IMF. The nearly one-year-long “peacock dance” with and against the International Monetary Fund obviously made an impression, especially since government propaganda tried to convince the population that the IMF made all sorts of demands on the country. Medián also broke the figures down further. They ascertained that among those who support Orbán’s war of independence 71% percent considered the IMF the chief enemy. International financial groups and the international credit rating institutions followed close behind. And then came the “lesser” enemies.

Who are Hungary's "enemies"?

Who are Hungary’s “enemies”?

As you can see from the first graph, 70% of Hungarians are opposed to Orbán’s war against Brussels. It is perhaps even more significant that half of those who in general support a forceful defense of Hungarian national interests think that the European Union should not be the target. When it comes to the United States and Germany, the numbers who support Orbán are insignificant.

Finally, Medián broke down the data by party preference. It was to be expected that Fidesz voters, on the whole, would support Viktor Orbán in his fight against the enemies of Hungary, but even they are not wholehearted supporters of the idea. The size of the group that has no opinion is fairly high, which might mean a degree of hesitation on their part.

Is the government's war of indepenence necessary?

Is the government’s war of independence necessary?

There is nothing surprising about the voters of MSZP, Együtt 2014, and other smaller parties (which also includes DK), but the figures for those “without party” is highly significant. It is unlikely that Fidesz could get much support from this group at election time. The percentage of those who oppose Viktor Orbán’s foreign policy–if you can call his war of independence a foreign policy– is very close to the figure for voters of the opposition parties. That doesn’t bode well for Fidesz.

In brief, this poll shows that the European Union, which has every reason to regard Viktor Orbán as a menace and a danger to the democratic governance of the European Union, should not be fainthearted. It should stand up for democratic principles and not buckle under because of a fear of adverse repercussions in Hungary. Fidesz supporters are often loud. But decibels don’t always correlate with actual strength. Over a wide range of issues there are anti-government rumblings among the large bloc of unaffiliated voters, even some among Fidesz voters. And as far as Orbán’s fight with the outside world is concerned, it has only slim support at home. In his attempt to isolate Hungary he may be isolating himself.