The weak link just got weaker

Both the Hungarian government on one side and the IMF and the EU on the other will have to accept some measure of blame for the failure of negotiations on Hungary’s financial situation, which were suspended on 17 July. With its 29-point economic programme, the government, which has been led since 29 May by conservative Viktor Orbán, presented its creditors with a fait accompli, while the IMF and the EU responded with an extraordinary display of intransigence.

And no one, it seems, is willing to acknowledge the critical importance of the subject of the talks: a two-month extension on the 20 billion euro loan which Hungary borrowed in October 2008, and also — although this has been denied by the IMF — the negotiation of a new safety net credit for 2011.

Uncompromising and equally obstinate

Like a bachelor who insists that his virgin bride should also be a skilled lover, the IMF and the EU were more than obdurate in their insistence on mutually exclusive criteria. In public declarations, both organisations had some polite words to say — to wit the IMF’s acknowledgement that Hungary had made significant progress in its economic recovery, and the EU’s welcoming of the new government’s commitment to cut the budget deficit to 3.8% in 2010 — but refused to budge on any of their demands.

Both were uncompromising in their opposition to a tax on banks, but equally obstinate on deficit control. Both demanded structural reforms, but neither would allow the government any room for manoeuvre. Whereas they were willing to express their compassion for Hungarians who will have to accept difficult fiscal measures (i.e. higher income taxes) and budget restrictions (i.e. spending cuts), they nonetheless insisted that the government “will have to make a greater effort,” which will include speeding up the liquidation of major state companies, which are operating at a loss.

Did Matolcsy attend a wholly different series of talks?

In its declarations, the EU was even more severe than the IMF. The Hungarian government will require “more time” to provide precise information on public transport, health care and structural reforms. The IMF and the EU, which expect a stable environment for Hungarian and foreign investors, are pressuring the government “to respect the full independence of the central bank.” And in this regard they have been worried by a number of decisions, in particular the deferred introduction of a new budget-reporting system. It was on this basis that the delegates of the IMF and the EU opted to postpone their report and to resume interviews in September.

You might be forgiven for thinking that Finance Minister György Matolcsy attended a wholly different series of talks, especially when you consider his assertion that the IMF and the EU “welcomed” the initiative to impose a tax on banks. Not only did both organisations announce their unequivocal opposition to this initiative, but they also indicated that they were unhappy with the proposal to impose a 75% pay cut on the Central bank Governor András Simor who will now have to make do with 8 million forints or 6,950 euros per month.

An unprecedented and dangerous situation

Matolcsy also failed to mention the European Commission’s view on the 29-point plan: “the proposed measures would result in market distortion and be in breach of European law.” The delegates from both organisations are not angry with Orbán because he did not consult them before publishing the 29 proposals. But they feel he should have checked to see if they complied with European legislation. Clearly, it would have made more sense for Orbán —the instigator of the 29-point plan and the chief decision maker — to take part in the initial stages of negotiations instead of conducting a last-minute meeting with the delegation.

Today Hungary faces an unprecedented and dangerous situation, which will require urgent attention from the government if we are to avoid the serious economic and financial consequences that could result from the suspension of the negotiations. There is no denying the concern expressed by Hungarians during the agonising wait before financial markets opened on Monday. As expected, on 19 July, the forint fell by 2.4% against the euro.

Opinion

Playing with fire

There is no denying that finance ministers in Greece and Portugal may be envious of the apparent liberty enjoyed by their colleague in Budapest, remarks Handelsblatt. As the daily points out, Hungary is a country that “clearly lives beyond its means with all the benefits of a currency which, unlike the euro, can come under pressure without threatening to undermine the global financial system. As a state, Hungary is sufficiently large to be on the map and sufficiently small to avoid triggering a domino effect.” But in spite of the foregoing, the German economic newspaper warns that Hungary represents an explosive danger for Europe — a lesson that one Austrian bank in Budapest recently learned to its cost when it was forced to merge with its parent company to guarantee the necessary funds to cover its risks in Eastern Europe.

"Hungary is not alone, and the crisis will weaken all of Central Europe with the exception of Poland and the Czech Republic," points out Handelsblatt. If in response to the crisis, the Greek banks decide to withdraw from the Balkans, “then the Austrian, Italian and French banks which are the main players in Eastern Europe will have to carry a much heavier burden.” It is on this basis that Handelsblatt insists that both the IMF and the EU on one side, and the Hungarian government on the other, should stop playing with fire and return to the negotiating table.