Sunday, 8 January 2012


Liberal media in Poland and across Europe have joyfully relished on the economic decline of Hungary under Victor Orban’s rule. The fellow CEE country does not fare well, despite Mr Obran’s peculiar efforts to tackle the crisis and may face insolvency even sooner than far more stricken Greece.

When examining economic situation of Hungary, biased media often leave out how Hungarian economy was wrecked by eight years of leftist rule, marked by soaring corruption, concealing ever-deteriorating state of public finances and unfettered living beyond means, both on public and private level. In September 2006, confessions of Hungary’s former prime minister leaked to the media and triggered widespread outrage. Things came to a head. While neighbouring economies were booming, Hungary had to implement first austerity programme, aimed at turning public finances around. Retrenchments slowed the economy down, yet the country kept moving ahead. The veritable turmoil sparked off in autumn 2008, when CEE currencies were sold off in the wake of Lehman bankruptcy. The sell-off of Hungarian forint was much more justified than in the case of Polish zloty, as Hungarian economy has already suffered from structural problems. Hungarian central bank immediately jacked up interest rates, hoping that the higher price of money would attract speculative capital. It did not, but as each interest hike, the move stifled the already ailing economy.

The Hungarian economy was particularly severely hit by depreciating HUF, mainly owing to unconstrained mortgage lending in foreign currencies. Millions of Hungarians have found it increasingly difficult to service their mortgage debts. Many borrowers defaulted on their obligations, so banks had to make massive write-offs on bad loans, households had to tighten the belt, cut down on various expenses and keep servicing their debts. As a result, consumption and investments fell, government spending was also curbed. Hungary was the first country that applied for a bail-out from the IMF and EU to bring back financial stability in the country.

Such pitiable was the shape of Hungarian economy taken over by Mr Orban’s party in mid- 2010, after it had won over two-third seats in the parliament, majority allowing to pass almost any law they wanted, including entitlement to change constitution. Mr Orban, in over year and a half managed to make extensive use of power he had been entrusted. He has had many successful attempts to tweak with scope of civic liberties, including free speech, economic order has also been revamped. The most controversial economic changes were:

1) Nationalisation of assets held by pension funds and using it to reduce public debt. As an unfaltering critic of obligatory participation to private-run pension funds, I could agree this was a good move. But look at the way it has been done. Citizens were given the choice – either to transfer “their” savings into the state-run system, or to pay pension contributions to both the state and to private-run funds and retain “their” savings in the private-run system, but being deprived of the right to pension benefit paid by the state. Fair deal? Plus note pension funds were scrapped not because they had been a scam, but only to inject cash the state budget had been running out of.

2) Freezing CHF/HUF rate at which distressed debtors repaid their CHF-denominated mortgages. In the first variant the rate was to be fixed for a few years, the government would pay the difference between the fixed rate and market rate, and debtors would repay the difference after a few years. In the second variant, losses were covered by banks which had granted loans. This reminds of the option quarrel, when some politicians also tried to nullify legally binding contracts.

3) Taxation reform, consisting in replacing two PIT rates of 17% and 32% by a flat tax of 16% - the measure did not revive the economy, but, predictably, brought down budget revenues. Guess who benefited the most… From 1 January 2012 key VAT rate was raised from 25% to 27%. Guess who lost the most…

4) Tampering with central bank’s independence, allowing political influence on the decisions taken by hitherto independent body and making it possible for the government to tap its monetary reserves to pay government debt in foreign currencies.

Well, until now the uncanny experiments have not dragged the Hungarian economy out of the recession. Over the last month three main rating agencies have downgraded Hungary’s sovereign rating to junk status, this should not be put down only to high debt-toGDP ratio of approximately 80%. The main reason for the downgrade was the unpredictability of Hungarian decision-makers. As the ex-member of Polish monetary policy council said yesterday, these are not only several ratios, determining a country’s capacity to service debt, that set debt service costs, the key driver of financing costs is credibility and Hungarian government completely lacks it. No wonder it has to pay over 10% for its 10Y bonds, yet it puts a bold face and declares readiness to turn down potential financial aid from the IMF and the EU, condition on pulling back from curbing central bank’s independence.

No one should draw pleasure from watching our ill-run neighbour going under (unless you are a currency speculator). But Hungarian troubles should teach us a lesson. Remember the evening of 9 October 2011 when Jarosław Kaczyński expressed his hopes that one day there would be Budapest in Warsaw? Not letting it happen does not simply mean preventing Mr Kaczyński from winning majority in the parliament. If we do not want Poland to follow the path of Hungary we have to prevent it from plunging into such economic and political downfall. To some extent, it is rather improbable that things in Poland might with take a dire shape. Political class is not as corrupt as it was in Hungary, we have never lived beyond our means to the extent Hungarians did, burden of mortgage debts is not too heavy to carry for Poles, public finances are in a better shape, but... Do we know if the ruling politicians tell us the truth about public finances? I think Mr Rostowski runs our finances quite prudently, but when I listen to him, I am not convinced he tells the whole truth. It is not inconceivable that, when in distress, Polish central bank might buy up Polish government bonds, which would be a violation of constitution and would be actual act of printing money – if this happens, expect a condemnation on PES.

Whatever future holds for Hungary and for Poland, I hope Hungarians and other nations draw conclusions from the current economic ailments of the former country. Whenever we assess Mr Orban, we must not forget about the context in which he gained power. At least we cannot accuse him of inactivity. He does try to overcome the crisis. A drowning man will catch a straw, so maybe this might be excuse for moves which in my opinion are inexcusable and detrimental for the economy. Time and financial markets will soon prove somebody right.

Financial markets, I say. Very few countries can afford to mess with financial markets. And you can do it only if you do not have to rely on them, i.e. when you do not have to finance your debt by issuing bonds. Mr Orban unfortunately forgot that public debt of his country accounts for 80% of GDP, so he might be fighting a losing battle…

No comments: