Economy, schmeconomy... The world according to Viktor Orbán by György Lázár

György Lázár, the author of today's post, is a Hungarian-American investor. In the past he was senior consultant for Silicon Valley technology firms, Wells Fargo Bank, and Bank of America in California.

When recently an IMF delegation arrived in Budapest to discuss the sad state of Hungarian finances, they expected that Hungarian officials would be ready and willing to discuss the budget numbers. Prime Minister Viktor Orbán had other things in his mind. He flew to South Africa to watch the World Cup soccer final with his pal, OTP boss and billionaire Mr. Csányi. When he finally met the IMF delegation, he told them that Hungary was about to regain its financial sovereignty, and he wouldn’t let the IMF stick its nose into budget details. The IMF bureaucrats were stunned and left.

His fellow Fidesz party members love Mr. Orbán’s tough talk. They have an absolute majority in the Parliament and prefer fast and simple solutions to complex problems. The older folks always overcomplicate the finance stuff. Mr. Bence Rétvári, a 31-year-old lawyer and Orbán’s junior minister, has suggested a moratorium on foreclosure. He conducted no impact studies and had no consensus with the real-estate industry. Mr. Orbán cannot let greedy bankers foreclose on late mortgages! The Parliament unanimously approved the law which banned all foreclosure in the entire country until April 15, 2011! Some say the moratorium will increase real-estate deflation and result in a cascading collapse of mortgages.

Mr. Antal Rogán, another young turk, suggested the reduction of financial reporting requirements for state owned companies, to “increase transparency”. He probably never heard about “off-balance-sheet-accounting” or about the collapse of Enron. Now in Hungary it is legal (almost mandatory) to hide state company losses. When Mr. György Kopits, a U.S. trained economist and ex-IMF official, protested, Rogán told him he should mind his own business. Ironically Mr. Kopits is supposed to oversee Hungary’s budgets.

When IMF officials asked Mr. György Matolcsy how he will finance the new giant real estate management company which is supposed to purchase foreclosed apartments and lease them back to the very same people who defaulted on their mortgages, he explained that the state will provide guarantees; absolutely no money is needed for this scheme.The IMF reminded him that Fannie Mae and Freddie Mac went bankrupt on similar guarantees. Matolcsy explained that that is a bad American example and noted that Hungary doesn’t need rich American uncles to do this financial exercise.

Mr. Orbán and his loyal team don’t seem to care or understand much about finances; they are experts on political strategy. Mr. Orbán knows that the IMF and the EU badly need a success story and Hungary is still relatively well managed; it could easily be one. He also made a clever fuss about his central bank chief’s astronomical salary. The European Central Bank, the IMF and the EU have all fallen into Orbán’s trap. They are lined up behind Mr. Simor. Now Mr. Orbán calls them the “little bankers club,” protecting each others' salaries. He scored points here. The last thing the overpaid Eurobureaucrats want is to discuss their outrageous salaries. Even the rating agencies, Moody’s and Standard & Poor’s, might make fools of themselves. If they lower Hungary’s rating, Orbán has a good argument that Hungary today has one of the lowest budget deficits in the EU, and in the recent stress test Hungary’s banks came out on the top.

Orbán’s unusual high-wire act might work, but he must avoid Hungary’s debt downgrade to “junk”. This is easier said than done, because the debt is currently under review and the other shoe can drop at any moment. A sovereign debt downgrade, with a run on the forint or on the banks will probably finish his government.

In the meantime he assured his fans that his decisions are not based on ideology, but on "common sense". He also introduced his new political slogan, "National Centrum." In a TV interview he confessed that he personally came up with the phrase.

Comments

[Matt L]

Mr. Lázár, thank you for a very informative and articulate post.

[Adam LeBor]

Very interesting article. "A high-wire act" is right. I wrote something about this in the Times, arguing that Orban was right to stand up to the IMF. Sovereign nations also have rights as well as responsibilities. But of course after the local elections, once all goes to Fidesz's plan and Jobbik is trounced, the IMF may well get a more emollient reception. Orban is nothing if not a supreme pragmatist. Then again, Jobbik may refuse to be trounced and get even more votes. Either way the anger here about economic issues will not mean more votes for the socialists...

[Odin's Lost Eye]

Mr Lázár as I have said in a previous comment to the post called “Attacks on the constitutional order in Hungary” the view of Orban Victor from the ‘Gazdas’ (persons who are mainly self/un-employed) in the local Kocsma (pub/beer house) is that he is a ’Mighty One’. I can see why he and his party are using this political manoeuvring as they have their eye firmly on the Local Elections. He is playing the only real card that Jobbik has, the ‘nationalist card’ and he is playing it for all he is worth.
But in doing so he is upsetting those who should not be upset and is ignoring the ‘two elephants sitting in the corner’.
His latest ideas are to hide some of his country’s debts by making secret the countries nationalised industries losses. Hiding some of their national debts is exactly what Greece did in order to join the Euro and look what happened when those chickens came home to roost.
The first Elephants is Hungary’s sovereign debt and the other is Hungary’s private debt which is mainly secured on property. I understand that Hungary’s debts are at present 80% of GDP. As you say the danger is that people like Standard and Poor, who have much influence in the world of finance, will downgrade Hungary’s sovereign debt rating.
The second ‘elephant’ is the problem of default on private debt. This deflates the housing/land market and produces negative equity. The moratorium on repossessions by the banks will produce a situation where now almost worthless assets are taken over by giant real estate Management Company which is supposed to purchase foreclosed apartments and lease them back to the very same people who defaulted on their mortgages. Knowing the Hungarian this will become a free-loaders paradise because the now tenants will not pay their rent and then what? Eviction will drive you back to ‘square 1’.
Which ever way it goes both foreign and Hungarian banks will ‘pick up the losses’. This will increase reluctance to lend anything to Hungary at any price.
As you say Mr Lazar ** “Mr. Orbán knows that the IMF and the EU badly need a success story and Hungary is still relatively well managed; it could easily be one.” **. If this is true then Orban is going to push it to the limit and beyond, but he must remember that there are other candidates for the ‘accolade of success’, who are much more amenable to the disciplines of financial prudence and openness required.
To service these debts Hungary needs what I call productive investments both large and small. And there is the rub. The only real productive investments are those which provide ‘Goods for Sale’. Hungary’s best assets are its agriculture and its light industries. Both these are crippled, Agriculture by the inability of Foreign Farmers to buy land invest in the machinery and farm it in the western way.
Its light industries were almost destroyed by the communists in their drive for the Stalinist dream of Heavy Industry. The light industrial world is now dominated by the Chinese/Indians so where to now? Hungary has very little in the way of raw materials so it must ‘buy them in. To benefit from the added value they must find ‘niche markets’ and produce quality goods. A task which requires discipline and an attitude to work which I fear will need a sea change in their attitude to work and to the way they do business which I fear is beyond them.

[Jules]

Great post. Good insights. @Odin "A task which requires discipline and an attitude to work which I fear will need a sea change in their attitude to work and to the way they do business which I fear is beyond them." This is surely the understatement of the year. You are right. Since Fidesz believes they are doing the right things in the right way, they don't think/know there's a problem with their discipline and/or attitude. Their mantra is: "Problem? What problem?"

[Odin's Lost Eye]

Mr. Jules
You say "Their mantra is "Problem? What problem?"".
When I wrote about ‘a sea change in their attitude to work and to the way they do business which I fear is beyond them.’ I was referring to the bulk of the population in general’. I could rabbit on about this for a long time
As we see from his latest capers of the ‘Mighty One’ –Orban Viktor- he is trying to build a system in which he is truly the ‘Mighty One’. This model of government dates back to the Communists and before that to the Czarist/Austrian Monarchy and even to the Papacy. This was the only model of Government they knew and it suits their mentality.
Thank God for the mistake made when Magna Carta (which was the first curb on absolute power) was signed and for the Long Bow which put the ‘fear of the Lord’ up anyone who tried to ‘dicker’ with it.
Oh the mistake, in modern English the charter reads ““No free man should be imprisoned, dispossessed, outlawed or exiled etc.” To do what the barons, who forced King John to sign it really wanted it to do it should have had read “No Lord, baron or other peer of the realm should be. . .”. This would have allowed the Barons etc to carry on ‘imprisoning, dispossessing etc’ the common man.
Can you imagine what the Constitution of the U.S of A would read like if it had been written by the top brass of Fidesz?
Ever since this bunch of ‘Jokers’ started their capers I have had a poem rattling around in my head (and English Literature was always my ‘shortest suite’). It is called ‘Ozymandias’ by Shelly. It begins: -
“I met a traveller from an antique land
Who said: "Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,”
And ends
“Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away".

[Jules]

@Odin: I agree w/you and enjoy your posts on this blog. BTW, I'm a Ms., not a Mr.! But don't sweat it!

[Paul Haynes]

Hi

I'm new to this blog and, although I find it interesting and a good read, I'm confused by the comments - or rather by their authors. I'm often unsure as to who is Hngarian and who isn't.

Some are obvious, but many have such good English and often use turns of phrase (etc) that only native English speakers would use, so it's hard to see them as Magyar. On the other hand, would any non-Hungarian have the knowledge and feelings frequently displayed in the comments?

I am an Angol married (for 8 years) to a Magyar and we spend as much time as we can in Hungary (we have a flat in Debrecen), so I am fairly clued up on Hungarian history, politics, etc, but (as my Hungarian is very poor) I don't know/understand anywhere as near as much as I'd like to.

Getting back on topic (finally!) - I get a great deal of pro-Fidesz/Orban propaganda from my in-laws, but personally find the current situation very worrying. The idea of a man like Orban, who seems to be prepared to do or say anything to get into power, having the ability to change the constitution without consultation (or even pause for thought) is, frankly, frightening.

Am I overreacting, or are things really as bad as they seem to me?

Hungary may only be my adopted country and I can always go back and stay in England if things get really bad, but my children are half Hungarian and I would want them to grow up proud to be part of a civilised European democracy, not ashamed of an 'Eastern European' basket case banana republic.

[Jules]

"Am I overreacting, or are things really as bad as they seem to me?"

Take it from a Hungarian-American who has lived here since 1991: it's bad.

[pgyzs]

"Am I overreacting, or are things really as bad as they seem to me?"

Yes, you are. I'm not a big fan of Orbán and Fidesz either and there's a lot of disgust inside me towards their personnel and symbolical policies, but the apocalypse depicted in this blog is exaggerated a lot. I feel the same when I'm watching a Michael Moore movie about republicians.

[Eva S. Balogh]

Paul: "I'm confused by the comments - or rather by their authors. I'm often unsure as to who is Hngarian and who isn't."

A mixed bag. We have quite a few English-speaking readers who are involved with Hungary professionally. For example, journalists or historians specializing in Hungary. Some of these people know Hungarian and often live there.

Then there are some who have Hungarian roots and therefore they have an interest in the country but were born and/or raised abroad. Also, there are some Hungarians with very good knowledge of English.

[Eva S. Balogh]

Jules and pgyzs have an entirely different take on the current situation. I'm closer to Jules's position. I consider the situation serious. I'm not predicting a dictatorship in Hungary because that wouldn't be tolerated within the European Union. But the introduction of a regime very similar to the political setup that existed between the two world wars is very likely. One big government party that simply cannot be dislodged. Right now the government is working on redrawing the voting districts!

The bills passed were timed in such a way that the new hand-picked president would sign them. So, no possibility of sending them to the Constitutional Court because clearly some of the details in these bills are unconstitutional.

Even apologists, like Gábor Török, the political commentator, can come up only with these lame words describing the government's actions: not elegant, not galant, it could have been more tasteful....

Most people would use different adjectives. Even conservative papers like Neue Zürcher Zeitung that in the past always sided with Fidesz is very critical. They just published a long article about how Orbán and company are muzzling the media. They even want to "supervise" the internet. And that is only the beginning.

My only hope is that their economic policies will force them to slow down and act more responsibly. However, I know Viktor Orbán well enough by now. He is a very stubborn guy and he is convinced that he is always right.

[Jules]

Even though I'm not a big fan of Fidesz (or any other Hungarian party for that matter -- but given my background people assume I am.) I started to come around when they announced Orban's 29 points, given the tax cuts, flat tax, and other, fairly positive-sounding fiscal steps. Then came dual-citizenship, the manifesto on the wall, etc. and again, I've lost the little faith I had. I REALLY thought they had learned their lessons over the years and would take charge of the economy, and the economy only, introducing difficult, but much-needed cuts in spending. I guess I was wrong.

They keep talking about job creation, but as someone mentioned in another post on this blog -- governments don't create jobs (for the sake of argument, let's disregard civil service, unnecessary pencil-pushing jobs). They can, however, create a climate that encourages investment and growth, which results in jobs. I'm not sure Matolcsy, for example, understands that his role as minister is not to create jobs per se, but rather to set the stage for others to create jobs. Until he understands that, I'm not sure there is too much reason to be hopeful at this point.

[merges]

The professional education system ruled by the monetary power so I don't expect you people to understand that, there's no country on Earth that had become stronger or economically sane after following IMF blackmailing system. All IMF dependents are doing worse then before. Is it a question of faith or simple you cannot stand seeing someone to have different opinion? I want your apologies after the Hungarian economical break through. Do you have the face for that?

[Jules]

@merges -- I doubt it's anybody's wish among the contributors to this blog for Hungary to fail. I myself have close to 20 years of my professional and personal life invested here; it would be self-hating for me to want Hungary to fail, as my livelihood depends on a strong Hungarian economy and confident investors. I don't think people who contribute to this blog are against freedom of opinion or freedom of speech. We may have different opinions on how Hungary might become successful, but I believe we all DO want Hungary to be successful. I think many contributors to this blog have issues with the IMF. However, in my opinion anyway, the bigger problem is how the current government communicates and handles certain negotiations. Within the course of a workday, we were told by Orban that the talks with the IMF were off; a different outlet showed Matolcsy saying the IMF would be back in September; and, as I recall, a third government person later in the day said something totally different. This confusion causes investor jitters, a weakening forint, etc. Unfortunately, from a communications point of view, Fidesz is often its own worst enemy.