The first signs of financial trouble

József Szájer, head of the Fidesz delegation to the European Parliament, only yesterday boasted about Hungary's arrival after eight years in the wilderness "at the High Street  (Fő utca) of Europe." I don't use "Main Street" as a translation because that has acquired a special meaning in English linked to provincialism and the ordinary citizen; it is often contrasted with Wall Street. What Szájer and other Fidesz politicians mean is something very different. In their heads "Fő utca" is just the opposite of Main Street. It suggests a meaning close to "forefront." Viktor Orbán considers himself a Hungarian intimately familiar with the world, someone who understands the intricacies of international politics and finance. In his first "international press conference" he in fact referred to "provincialism" as the trademark of the socialist government as opposed to his panoramic view of the world.

Unfortunately, it seems that provincialism in the sense of not understanding the interconnection between political sloganeering or petty local political squabbles for home consumption and international politics and finance is rather typical of Viktor Orbán's thinking. He was totally insensitive to foreign reactions to his policies in his first administration and as a result Hungary's foreign relations with the neighbors as well as with the United States and Russia were in a total shambles by 2002. It took his successors years to repair the broken bridges Orbán and his team left behind.

However, one was hoping that the political scientist László Kéri was right, that in the last eight years Orbán has matured a lot. After all, he was only 34 when he became prime minister in 1998. Alas, he has already made some unfortunate remarks that met with immediate negative reactions from the established High Street of Europe.

In 1998 the financial world at home and abroad reacted negatively to Fidesz's winning the elections. This time my distinct impression was that most analysts looked forward to a change of government and some of them actually welcomed the two-thirds majority that would enable the government to introduce the long overdue reforms. Not only the experts but investors as well enthusiastically greeted the Fidesz victory. While on April 11 (Sunday), on the day of the first round of the elections, one euro was worth 268.37 forints, after the elections the forint strengthened considerably. By April 14, the exchange rate was 262.20 forints to the euro. In the two weeks between the two rounds of the elections the forint weakened somewhat, but it was still around 263-265 forints to the euro. On April 26, that is a day after the elections, it again strengthened slightly (262.89), but then came Tuesday when it became a great deal weaker: it reached almost 270 forints to the euro. The last time the forint was that weak was in the middle of February of 2010.

What do the experts say? Of course, the Greek financial crisis had a substantial impact. But the forint also weakened on Viktor Orbán's less than careful utterances about the chairman of the Hungarian National Bank and his attitude toward the IMF. We can measure the effect of his statements by comparing the decline in the forint to that of other currencies in the region: the zloty and the Czech koruna also weakened but less so than the Hungarian currrency.

So, what did Viktor Orbán say that foreign investors didn't particularly like and foreign commentators wrote about? First and foremost, Viktor Orbán said a few less than diplomatic things about the International Monetary Fund. He announced at the international press conference that "neither the officials of the IMF nor those of the European Union are our bosses. We will negotiate but we don't bow to dictats." Thus the Financial Times Deutschland not surprisingly drew the conclusion that "Hungary is giving up its austerity program." In the middle of the Greek crisis this sounds especially ominous.

But Orbán didn't stop here. He said a few nasty things about András Simor, chairman of the Hungarian National Bank. It has been no secret that Orbán doesn't like Simor whom he called "an off-shore knight," referring to an earlier ownership of a consulting firm registered in Cyprus. Whatever we think of the chairman of a national bank owning a firm giving financial advice, any kind of change in the leadership of the Hungarian National Bank at the moment would have a very adverse effect. Yet there is no question that Orbán would like to force Simor out of office. Even if he himself didn't openly say so at the press conference, a day later one of his deputies in the party, Zoltán Pokorni, made it clear that the new administration expects Simor's resignation. Simor, whose term ends only in March 2013, has already indicated that he has no intention of leaving his post.

The reaction was immediate. Barclays Capital yesterday dealt with the threat of removing Simor, adding that it is unlikely that Simor will oblige, but they noted that the "political noise" might have an adverse effect on the bank's monetary policies. Barclays' analysts noted that even if Simor left, the new chairman would most likely continue his policies, but the market has trust in Simor and any "forced change" might adversely affect the exchange rate, and thus the ongoing reduction in the interest rate (which is at the moment the lowest since 1990) might come to a halt. J.P. Morgan followed suit, adding that the strained relations between the government and the Hungarian National Bank might have an adverse effect on investment.

So, all in all, it seems that the path to the High Street of Europe has its bumps.

Comments

[Mark]

I don't think Orbán had any choice to be honest about the scale of the deficit - because let's face it, Bajnai with the help of the IMF and EU has been keeping the debts of local authorities off the balance sheet, and these will have to be dealt with. Bajnai's policies haven't worked - the economy has contracted, the debt burden is substantially higher than it was at the end of 2008, the employment situation is an unmitigated disaster, and FIDESZ has the opportunity to approach things differently.

I hope that Orbán means what he says and that he will negotiate a realistic budget target with the IMF that enables short-term support for the economy and the labour market, in exchange for longer-term reform. HUF needs to fall, and in fact, if it falls far enough so that it reaches a sustainable level I see no reason why interest rates need to stay at their current levels (after all to some an extent they are supporting the maintenance of a ridiculously overvalued HUF which is crucifying the real economy). And, as for Simor - well, frankly, he does need to go.

Of course the elephant in the room is the public and household debt burden. But, let's face it - Hungary is bankrupt, and the time has come, as it is coming with states in southern Europe, that this has to be acknowledged, and there needs to be some serious effort to restructure these debts.

We'll see if Orbán is doing anything more than dog whistling (I remain suspicious that FIDESZ aims to continue the Bajnai course), but if this is a sign of recognition of the need for a change of course then it is welcome. Hungary's road will be bumpy, but there are no easy ways out of where it is, and I don't think FIDESZ has prepared the population for it. It is just a shame this was not recognised back in 2008.

[Gregory]

I am always surprised how political motivation can lead people used to structured thinking to simplistic answers. One look at country premiums (higher for Hungary than the Czech Republic or Poland, due to years of budgetary mismanagement), gives the direct answer why the Forint is more sensitive to the Greek news than the zloty or the koruna.
The reasons for these budgetary problems are complex, but the main responsibility falls on 8 years of socialist government. Don't try to blame the opposition for it.

[Odin's Lost eye]

The problems of most of the poorer European countries are due to the all too prevalent socialist idea of ‘Government Money’. This is a total myth! Governments do not have any money, only people do. This myth leads to the idea that Governments know how to spend the people’s money better than the people do. As Governments spend more and more of their people’s had won money they tend to (and do) loose control of expenditure. They use accounting tricks (smoke and mirrors) to hide their debt as a result you get administrative bloat, borrowing out of control, and political difficulties (as in Greece). Because the idea of ‘Government Money’ is now so deeply entrenched in the ‘Establishment’ and is widely taught in colleges of Economics it has become the perceived truth. It takes very strong willed and determined politicians to over come it. The problem is that the ‘Establishment’ will do every thing in its power to get rid of such politicians. This will include down right disobedience, trickery and malfeasance of their political masters.
There is a second problem that is if there is an opportunity fro ‘graft’ someone will always exploit it.