With Hungary widely considered at special risk from the current global financial crisis, it’s no surprise that Prime Minister Ferenc Gyurcsány has called for a “national summit” to discuss issues related to the market meltdown. It’s not even particularly surprising that opposition leader Viktor Orbán – who is almost certain to take Gyurcsány’s position within the next 18 months, and who is not normally on speaking terms with his adversary – has agreed to attend the meeting scheduled for this Saturday. Unfortunately, it’s equally unsurprising that the event now seems almost certain to end up as yet another inconsequential exercise in political grandstanding rather than a crucial opportunity to protect the country from utterly going down the tubes.
The bottom line is that without a credible fiscal roadmap for the next several years, Hungary is very likely to end up suffering a financial cataclysm of the sort that is becoming familiar even to people without any experience in international finance. I’m not just talking a few extra quarters of slow growth compared to the neighbors, or a nervous-making increase in volatility in markets for the forint and forint-denominated assets. I mean about a monstrous devaluation of the forint – Ft 300/€ would be just a start – followed by a total collapse in consumer spending and possibly a default on the country’s forex-denominated liabilities, which would in turn lead to… well, let’s just call it the end of Hungary as we know it, and not in a good way.
As with America’s financial calamity, some of the problem can be pinned on irrational risk-taking by consumers, who in Hungary have been loading up on loans denominated in foreign currency, primarily Suisse francs. Were the HUF to take a sudden nose-dive, the principal and interest payments on these loans would balloon, casting thousands into personal bankruptcy, and robbing domestic businesses of the customers they need to expand or just survive.
But the primary problem is the lack of any self-control on the part of the country’s political class, which has stubbornly refused to confront its out-of-control addiction to public spending. Yes, the budget deficit has narrowed some over the past few years, and right now doesn’t look like it is going to widen dramatically in the near future. But whatever improvement to the fiscal account we have seen has been mostly due to increases on the revenue side, in the form of new taxes and a renewed effort by the APEH to drag “black” workers and businesses onto the tax rolls. All the yelping about austerity we hear is basically bunk; as a fraction of national income the state budget hasn’t budged. The Hungarian state is still eating roughly half of the country’s GDP, and wasting much of this half on half-baked programs which mostly seemed designed to line the pockets of the well-connected parasites Hungarians somehow still confuse with honest businesspeople.
My guess is that Saturday’s summit will go something like this: First, lots of ponderous speechifying from the government side about how Hungary is a “victim” of a worldwide problem not of its making and how the EU will help it avoid the abyss. Then some finger-pointing from Fidesz about the government’s incompetence and corruption is preventing it from balancing the budget by radically cutting taxes while raising state spending. After this the Liberals will get up and demand sweeping cuts in taxes and spending, except the bits that the Liberals like, while the center-right MDF offers some combination of all of the above which everyone just ignores.
But how about this instead: Let everyone in the room talk as much as they want, but only about specific areas of state spending where cuts can be made – or more can be gotten for less – just like members of a (functional) family or business under financial stress might work together to figure out how to get back above water.
Given that every line of the budget means a lifeline for some voter or crony, I wouldn’t expect billions and billions in potential savings to be identified. But even if the assembled worthies only managed to conduct a halfhearted discussion on the need for restraint, it would send an instant message to the markets that Hungary is at least aware it needs to contain its spendthrift public sector. A small degree of confidence would return to the (very large) market for Hungarian state debt, the country’s external financing terms might be a few fractions of a percentage point friendlier, and the stage would be better set for long-term growth and a successful adoption of the euro. And if nothing else, the speeches would probably end up being mercifully brief.
I agree with the comments of how the jamboree will end up on Saturday. But as we can see when the first rescue package did not pass in the US there was punishment from the market. I think the same will happen on Monday. More talk – no matter if it is actually a recognition of true problems, will not matter. Actual action needs to be taken now which must occur in committee meeting rooms where legislation must be drafted to truly cut the state. I have no hope for this, as the leaders have proven there is no bottom for their contempt for each other. The Hungarian economy and the people will be dragged down into the depths of this economic crisis – probably near the bottom, where they already reside on most economic lists.
Let’s not get carried away, most of this is far from bad news. Most people expected a ‘correction’ on the money markets in August, so it came a little later. The forint was horribly overpriced for the state of the economy. Everything else is hardly news. Looking at the historical data the forint is approaching where it was (and should have been) last time inflation and GDP was around this level. I’d expect it to fall more, to pretty much the level you predict 300 to the Euro, or maybe 365 to the GBP (depending on their ability to shore up their banks).
If I were to list the positives it’s these:
1. The size of Government apparatus has to shrink.
2. Orbán’s and anyone else’s spending promises look as foolish as they always were, but now more so.
3. Exports are cheaper.
4. Better for tourists.
5. Relative cost of labour looks better for outsourcers.
Outside of all this, someone may finally get serious about tackling the inequality that means roughly 10% of the population is deliberately excluded from the active workforce – namely the Roma.
And perhaps one day we can all expect fewer state car convoys blocking our roads, less paperwork, judges and notaries that have to work a decent working week (for at least 45 weeks of the year).
And hopefully from Realdeal.hu fewer crappy stories from big name property investors about how much growth they expect from new property, when they are all lining up for a good old kicking any time soon.
Vándorló your 5 points are spot on! I would like add one more, which is ‘The willingnes for Hungarians to actualy do some productive work and work effectivly’.
Just as the HUF climbed to giddying heights, I’m wondering how it’ll just reach it’s happy point and stop. Erik’s prediction seems a bit more realistic. On both Tuesday and Thursday MNB had very bad days at the auction even after pulling the 1/2 the lot off the block.
I’m wondering why bond holders who are now getting a taste for HU policy react when they cash out and are confronted with tax policies that do not< \b> recognize losses? Will they be tempted again to lodge a billion HUF here only to pay 20% tax and repatriate 85% of what they parked a year previously?
As to the Jamboree, is it still worth pondering what could be done? Erik’s right, it’s a grandstandingfest. These folk just don’t give a hoot about their country. The Rout is coming and even if something could mitigate such, this country doesn’t have the mechanisms to implement such… Instead, one needs to start thinking about how to operate in the “new” HU. For us (a mixed expat/HU family), for example, we’re thinking about how to support my wife’s pensioner parents and aunt who (@Erik btw did work hard for 45+ years, paid into this state) shouldn’t expect much in future and won’t have a TB on which to rely. About the low-income sister’s family who’s benefits will no longer stretch past the first Friday of the month.
Well looks like we are heading for the 300ft/Euro after all, but longer term I think 290ft till May. I don’t see it settling at 255-60 as some analysts say. Given the data we now know about the UK (what a lying bunch of useless ***** they all turned out to be) the exchange should eventually pan out at somewhere between 315-325ft until May. With the US the temporary euphoria of the inauguration will wear off in two weeks and will settle down at 210 then (6 weeks) to 195. Nothing I hear coming from any party gives me any hope that the current cost-push induced stagflation of government policies on taxes will break. Fidesz spending alternatives are even worse.
I just want to say that I really liked and agreed with this article, and with the interesting and worthwhile comments here. I have been getting a bit sick of some of the ridiculous comments/threads posted on this group of sites. But these have been great.
Lets take stock 100 days since the Jamboree.
The HUF has gone from 184 HUF/USD to 221.
The country is trying to reduce interest rates and bond yields while hoping to make use of the IMF loan but the currency continues to sag, why?
MNB appears powerless. If the HUF drops those with HU Paper lose and might bolt (like before) divesting their holdings, causing the HUF to slide further; impacting those with forex mortgage (JPY notes for ex. now cost nearly double what they did 1 year ago), as well as the cost of all the goods we import.
But to do the opposite and try to defend against capital flight by increasing rates in turn pushes up working capital costs (already pricy due to credit crunch scarcity) and therefore prices & demand.
To add to the woes, the major export market Germany has gone cold, lowering demand.
Companies wind down, the tax-base swaps over to become benefit collectors. Multi’s downsize or abandon HU, also weakening the HUF. Savvy investors (in HU) must wonder when the good times return, will they also? Or will they be wiser & less willing to foot the costs of the HU social system? Either way, will there still be revenues to cover that debt.
The diaspora in general (points out the Economist) are unable to fund relatives back home; even less demand for HUF.
Outside of the catering bill, what did we get out of the Summit? Nothing but the same old choke the patient to death policies of “raise taxes more.”