IMF Casts Doubt on Hungary’s Fiscal Strategy

2010-07-20

Prognosis

 

Fidesz vs. the Fund: IMF Casts Doubt on Hungary’s Fiscal Strategy

  • The International Monetary Fund suspended its review of Hungary’s €20 billion standby loan July 17 after the government refused to implement new austerity measures and insisted on levying a hefty tax on the financial sector. This means Hungary will not be able to access some €5.5 billion euros of its loan package until the talks are completed.
  • Although Hungary currently has no urgent need for outside financing, the IMF loan served as a safety net should the country find itself in a tight spot. The suspension of the talks rattled investor confidence: The forint sank nearly 3% against the euro and Hungary’s benchmark BUX index plunged as much as 5% when markets opened on July 19.
  • This is the second time the forint has gone into freefall since Prime Minister Viktor Orbán’s Fidesz party took power in late May. Despite the government’s numerous blunders, its popular support is unlikely to decline significantly anytime soon – especially with the opposition unable to put up any serious challenges to Fidesz’s rule.
  • Fidesz has not proposed any structural changes in many sectors, saying it is still in a “getting acquainted” phase. A few changes have happened in education, healthcare and infrastructure policy, but none of these qualifies as wholesale reform. That will have to wait until autumn, possibly after the October municipal elections wrap up.
  • Centralization is going ahead as planned in political strategy and day-to-day government operations: Orbán will control strategy and Deputy Prime Minister Tibor Navracsics will oversee the machinery of government.

 

IMF Heads Home as Fidesz Digs in Its Heels 

 

“No new austerity measures” was one of the few concrete promises in Fidesz’s all-things-for-all-people election campaign that brought it a two-thirds majority in Parliament. The government now appears bent on keeping this pledge, even if it means sparking another run on the forint and making life (more) miserable for the estimated 1.7 million Hungarians who hold loans denominated in foreign currency.

  • The main stumbling block in Fidesz’s talks with the IMF is its reluctance to make “difficult decisions” on spending cuts, according to an IMF statement released July 17. Although Orbán’s Economic Action Plan will lay off thousands of public-sector workers, IMF managers are looking for permanent reforms that will prevent the country from falling back toward insolvency. They also do not like the fact that the government presented the action plan as a fait accompli, leaving little room for objections.
  • Fund managers are dissatisfied with Orbán’s proposed method for keeping Hungary’s 2010 budget-deficit target of 3.8% of GDP. The administration wants to put most of the burden on banks with a HUF 200 billion (€692.1 million) tax on the financial sector. The IMF argues this will hurt lending and economic growth. What’s more, the tax would expire within three years.
  • The failure of the negotiations will further weaken the position of National Economy Minister György Matolcsy, whose fiscal plans seem impossible to implement. Matolcsy is casting the conflict as a choice between the bank tax and austerity. He argues that Hungary has applied austerity since 2006 without positive results.
  • The European Union, which has put up €6.5 billion of the IMF standby loan package, released a separate statement saying spending cuts would be necessary for Hungary to get its budget deficit below 3% of GDP by 2011.

The negotiations will surely get back on track; fund managers are planning to return to Hungary in September, Matolcsy said on CNBC television July 19. The IMF needs to showcase Hungary as an example of the benefits that come when governments follow its prescription for economic health. Hungary has been the IMF’s sole success story in Europe during the financial crisis that began in 2008; Fund managers were already using Hungary as their poster child when the Greek crisis erupted earlier this year. Neither the IMF nor the EU is interested in an escalating crisis that could inflict pain on all of Europe.

  • The IMF is probably counting on the temporary market tumult to weaken Fidesz’s resolve. The most likely scenario is that the government will eventually back down; Orbán will probably try to convince his supporters that any future spending cuts somehow do not qualify as austerity measures.
  • Fidesz has an interest in mending fences with the IMF. Bad relations with fund managers will make it more difficult for Hungary to renew its loan facility for next year and will mean stricter loan terms.
  • The pro-Fidesz press, which operates as quasi-official party media, is pleased that the IMF team left Budapest fuming. They are casting the entire incident as a national victory, while Fidesz MPs accuse anyone who dares criticize the administration as a pro-IMF partisan who has little regard for the national interest.

The spat between the IMF and Fidesz casts a pall on the 29-point Economic Action Plan that Orbán presented in Parliament June 8. The plan assured Hungary’s international partners that Fidesz would not diverge significantly from the tight-budget path that former Prime Minister Gordon Bajnai had followed over the past year. And by placing practically the entire burden on financial institutions and the public sector, Orbán curried favor with small- and medium-sized business owners, as well as most voters.

  • Part of the problem is timing: Right before Fidesz won Hungary’s elections last April, the world plunged into financial panic, touched off by the Greek debt crisis that threatened to rip through Spain, Portugal, Ireland and Italy as well. Fidesz was forced to abandon its idea of widening the budget deficit to stimulate Hungary’s economy. The party embraced fiscal discipline – as well as the 3.8% of GDP budget-deficit target spelled out in the IMF loan package. Now, it is clear that any divergence from this path will send shivers through the investment community – not just in Hungary, but across Europe.
  • As it stands, Hungary has no hope of meeting its deficit target without the bank tax. Matolcsy does not want to negotiate about the size of the tax; if bank managers wrangle out any concessions, they would go into effect next year at the earliest.

Since taking office two months ago, Fidesz’s conduct has shaken the (already shaky) confidence of foreign investors:

  • In the first week of June, Fidesz Vice President Lajos Kósa and Orbán spokesman Péter Szijjártó sent the forint into a tailspin with their exaggerated comments about the negative state of Hungary’s economy. 
  • Fidesz is continuing to skirmish with central bank Governor András Simor in relation to his offshore investments and his pay package.
  • The “soak-the-rich” rationale behind Fidesz’s bank tax is blatantly political, not economic. Consequently, Fidesz has reinforced its reputation as a government that uses economic policy for popularity purposes. This image loss will make the government’s economic job even tougher.

 

Jobbik May Kick Off Local-Election Campaign Early

  • Jobbik’s opinion-poll ratings have dipped significantly over the past few weeks. The ultra right-wing party is therefore expected to return to the radical, provocative style of politicking it has been using over the past few years. The party will refocus its energy on public security problems and try to hold Fidesz accountable for its lack of progress in this area.
  • Jobbik will probably start campaigning for the October local elections earlier than other parties to make sure that its issues take center stage. The first step may be Jobbik President Gábor Vona’s recent tour of flood-ravaged Borsod-Abaúj-Zemplén and Szabolcs-Szatmár-Bereg, where he personally took stock of the government’s efforts to alleviate property damage and keep residents safe.
  • Should Jobbik fare significantly worse in the October 3 municipal vote than in the April general elections, strife may break out within party ranks. Jobbik’s parliamentary caucus is already a fairly motley group; a poor performance at the ballot box could easily bring tensions between “radicals” and “moderates” to the surface.

 

Acquiring MKB? Transformation of the banking sector

 

Orbán has long promised to transform the Hungarian banking sector, declaring that he wants Hungarian owners to control at least 50% of the country’s financial institutions by market share. Since his inauguration, his government has taken steps toward achieving this – but its methods are hardly market-friendly:

  1. The bank tax may lead to a concentration of the banking sector, with small banks abandoning the Hungarian market. This may benefit Sándor Csányi’s OTP Bank Nyrt., which will be able to scoop up the subsidiaries or branch offices of the departing banks. OTP would thus increase its share of the Hungarian market.
  2. Regulatory boost for Fidesz-friendly financial institutions. According to the “Lex Járai,” which lawmakers passed July 12, financial institutions that were established over the past three years will be exempt from the bank tax. This may mean several hundred million forints in savings for Wabard Insurance and CIG Pannónia Life Insurance, both of which are owned by people close to Fidesz. (CIG’s owners include former Fidesz Finance Minister Zsigmond Járai, current Foreign Minister János Martonyi and Orbán adviser György Szapáry.)
  3. Nationalization of MKB? (Hungarian Commercial Bank). Weekly news magazine Figyelő reported that the German Bayerische Landesbank is in talks with Orbán and Matolcsy to sell its Hungarian unit, MKB, to the government. Details are under wraps, including the price, the size of the stake, and how the government plans to handle the transaction’s impact on the budget deficit. Figyelősaid the German bank wanted €1 billion for the bank, while the Hungarians’ best offer was €300 million.

Both BayernLB and the Hungarian government denied they were in talks with each other.There is a chance MKB would be acquired by a state-owned institution, such as the Magyar Fejlesztési Bank Zrt. (Hungarian Development Bank), not directly by the state, Figyelő said.

 

 

MSZP: New Leadership, Old Malaise

  • The Hungarian Socialist Party (MSZP) elected a new president and executive board. This does not mean the party will be able to break out of the paralysis it has experienced since getting clobbered by Fidesz in April.
  • Attila Mesterházy’s takeover as party president is accompanied by the gradual removal of former Prime Minister Ferenc Gyurcsány and his faction from positions of party power.
  • It is becoming increasingly likely that policy differences within the MSZP will cause the party to split, but this probably will not happen before October 3 – at most, a few politicians may drop out. The party’s future may depend on whether the Socialists manage to portray themselves as a credible governing alternative to Fidesz this autumn.

 

Leading Trends

 

The Declaration of National Cooperation

 

The biggest political calamities sometimes result from the most obvious political mistakes. This may be the case with the new Declaration of National Cooperation, the 300-word political mantra that Orbán has ordered displayed in all central government buildings and military institutions. The document is mostly a rehash of the Fidesz’s vague campaign slogans: “Work, home, family, health and order will be the pillars of our common future.” Yet it also seeks to remind voters who is in charge of this common destiny: The April 2010 elections witnessed a “ballot-box revolution” comparable to the 1956 Revolution against the Soviets; Parliament will see this revolution through by building a new System of National Cooperation.

 

The declaration is obvious, high-profile and serves as a magnet for parody. The Socialists snapped out of their near-total paralysis with a bill that wickedly lampoons the document. The political consequences may be huge – possibly even the government’s eventual self-destruction.  IT serves as a symbol of Fidesz’s arrogance, breathing new life into accusations of Orbán’s “anti-democratic” and “dictatorial” inclinations that may last for the rest of the parliamentary term. 

 

Moreover, the ruckus over the Declaration of National Cooperation may dash Orbán’s hopes of making the new Constitution (scheduled for next spring) the cornerstone of his governance. The declaration has cast an aura of folly on the whole constitution project; it will be difficult to introduce a new text without wisecracks. Orbán’s party has promised to strengthen democratic values, but tinkering with the Constitution may easily have the opposite effect. Fidesz, once again, may become a victim of its own symbolism.

 

The incident reveals a great organizational anomaly within Fidesz: The intensely centralized power structure makes it impossible for party members to discourage decisions that may harm the party’s interests. Such faux pas can alienate voters and erode right-wing unity in the medium term.

 

Jobbik: Dazed and Disconcerted

 

Jobbik’s performance in Parliament has been somewhat underwhelming.  The party is unable to bring its issues to the forefront of public debate and is able to mount only feeble opposition to Fidesz’s rule.

 

This uncharacteristic reticence may have both technical and strategic reasons. One the one hand, the party has never been in Parliament before and may need time to get used to how things work; this is not helped by the fact that Fidesz is pushing through major legislation at lightning speed and opposition MPs are getting lost in the shuffle. Jobbik may also have made a conscious decision to moderate its style: Its MPs are growing noticeably less strident in their political positions. For example, Jobbik MPs reacted warmly to Fidesz’s Economic Action Plan and did not attack Pál Schmitt’s nomination as Hungarian president.

 

 

Before entering Parliament, Jobbik made political capital by trying to take ownership of problems that affect the majority of voters; now that the party is in Parliament, it is working to prove it can offer solutions to these problems. Jobbik is also trying to call attention to the similarities between Fidesz, the MSZP and the leftish Politics Can Be Different (LMP), promoting its image as the only party that is substantially different from the rest of the pack.

 

Jobbik’s change of style sheds light on its medium-term strategy: The party is trying to position itself as the only real political alternative to Fidesz, helped by the general ineptitude of both the MSZP and the LMP. This strategy has proved unsuccessful so far: Jobbik’s attempt at moderation has made it impossible to make a splash in public opinion; the party is more or less invisible compared to its profile during the 2010 general election campaign.

 

The only exception was Jobbik’s July 4 induction ceremony for its new paramilitary wing, the Hungarian National Guard (Magyar Nemzeti Gárda), in the heart of downtown Budapest. Jobbik formed the Hungarian National Guard after its original paramilitary unit, simply called the “Hungarian Guard,” was banned by the courts one year ago. (Jobbik insists it is not reviving an illegal organization under a new name.) In any event, the July 4 rally ended no differently than previous Jobbik/Guard ceremonies: Police arrested guard members by the dozen, even though a right-wing government is now in charge.

 

The Hungarian Guard, whether it contains the “national” moniker or not, will be problem for Jobbik in the long term. In the past, people looked up to the Guard as a symbol of resistance to the Socialist government’s dishonesty and incompetence; there is no such antipathy toward Fidesz. Jobbik is thus facing a quandary: If it continues to support the Guard, its efforts to adopt a moderate style will be for naught; should it abandon the Guard, it will discredit itself among its core supporters.

 

MSZP: Elections and Erosion

 

The MSZP is under new management following its spectacular defeat in the April elections. Attila Mesterházy, who stood against Orbán last April as the Socialist candidate for prime minister, was elected president at the July 10 party congress. It remains unclear how the party plans to rebuild itself: Members are talking about shifting to the left politically and bringing young, fresh faces into the party.

 

The new management indeed looks different from the old. Former Labor Minister Péter Kiss and former Defense Minister Imre Szerekes, two powerhouses from the previous government, are gone from the executive ranks. Mesterházy’s immediate predecessor as party president, Ildikó Lendvai, is going to dedicate herself to developing the party program. New faces include deputy president András Balogh, Hungary’s former ambassador to Thailand and the Socialists’ “sacrificial lamb” candidate for Hungarian president in June. He has not played any significant role in the MSZP over the past few years. Still, neither Balogh, 66, nor former European Commissioner László Kovács, 71, can be considered symbols of youthful vigor.

 

In reality, only two things are certain: The new Socialist leadership will spend most of its time criticizing Fidesz, and will work to squeeze out former Prime Minister Ferenc Gyurcsány and his entourage. Age was apparently not the top consideration during the party congress: The point was to ensure that the MSZP abandons the Gyurcsány administration’s liberal policies, distances itself from Gyurcsány’s style of leadership and waters down Gyurcsány’s (already weakened) influence on the party, according to anonymous sources in the press.

 

 

The Socialists have roughly three months before the October 3 municipal elections to prove that they, not the ultra-right Jobbik or the greenish-leftish LMP, offer a true governing alternative to Fidesz. This may be the last chance for the MSZP to prove to the voters (and naysayers within the party) that it can be more than an also-ran in the 2014 general elections.

 

The MSZP chose “A Fresh Start” as the motto for its party congress. Yet high-profile Socialist politicians, some from the previous government, continue to be hit by a constant stream of corruption accusations. Moreover, the party still gets a deer-in-the-headlights look when it comes to questions about its political direction. An era of Socialist renewal is hardly in the cards.

 

The Fourth President of the Republic of Hungary

 

Pál Schmitt is getting ready to trade his title as “Speaker of Parliament” for “President of the Republic.” Schmitt, a former ambassador, vice president of Fidesz, vice president of the European Parliament, and outgoing president of the Hungarian Olympic Committee won a two-thirds majority of votes in Parliament on the first ballot June 29. He will replace President László Sólyom on August 6.

 

With Schmitt as president, Fidesz has rid itself of any potential conflict between the government and the head of state. In Hungary, the president is basically a figurehead, but has limited power to veto legislation. Schmitt is a party loyalist; Sólyom has a reputation for being bullheadedly independent.

 

Schmitt’s election elicited protests – not just from the opposition protested, but from people within the right-wing camp as well.  Many members of the right-wing intelligentsia who are close to Fidesz would have liked to see Sólyom get a second term (Fidesz supported Sólyom for president in 2005). Moreover, press reports say László Kövér, the director of Fidesz’s executive board who is set to replace Schmitt as speaker of parliament, also opposed Schmitt’s election. (Kövér, who is one of Orbán’s closest confidants and a decisive force in Fidesz, did not confirm these reports, but did not deny them, either.)

 

Schmitt’s presidency will be essentially symbolic in the sense that he will not represent an independent political entity. His role will therefore be different from his predecessors’: President Árpád Göncz (1990-2000) was a liberal who mostly worked with right-wing administrations; his successors Ferenc Mádl (2000-2005) and Sólyom (2005-2010) were right-wingers in an era of left-wing governance.

 

Bureaucratic Reshuffle

 

The new government has been installing its people in the state bureaucracy at a brisk pace. As always, the opposition is accusing the administration of “political cleansing,” while the government refers to the principle of “to the victor belong the spoils.”

 

The personnel changes can be divided into several groups: First are the important administrative offices whose managers always change when a new government takes power, giving the governing party a chance to dole out patronage. Second are the kinds of changes that are intended to eliminate checks and balances on Fidesz’s power, such as the new leadership at the State Audit Agency (ÁSZ) or Schmitt’s election as president. Thirdly, people are being replaced in offices that have no political bearing; these changes appear to have private reasons.

 

Fidesz’s influence is thus spreading throughout the state bureaucracy. For example, the decision to bring back county administrative offices (which the Socialists had scrapped) gives Fidesz opportunity to install loyal party members on the county level. This may make things more efficient in the counties, but it also steps up central government control.

 


Based on Political Capital article by Péter Krekó, “Fidesz and Hubrisz,” Budapest Times, July 12, 2010,http://www.budapesttimes.hu/index.php?option=com_content&task=view&id=14885&Itemid=220

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