Zoltán Farkas
Hungarian Bubbles
In early March, during a visit by Prime Minister Gordon Brown, President
Barack Obama made an unguarded remark about "emerging markets like
Hungary or the Ukraine", and how to make sure their problems do not "wash
back onto our shores" . Well, it is hardly we who present a danger to America.
Hungary, on the other hand, faces a real threat after 2010 thanks to the
massive indebtedness of large nation states—and this goes for the whole of
Central and Eastern Europe, too.
How did we enter the picture? Mark Hutchinson, the editor of the New York
Times, scared his readers in February by saying that "the [US] federal
government's ratio of debt to gross domestic product [...] may equal Hungary's
current ratio." As a result of bank bailouts and fiscal stimulus, the US ratio of
debt to GDP will reach 70 per cent in the next three years, the level which has
made the financing of Hungary so difficult in the past six months, he added.
The latest European Commission forecast suggests the British figures are no
less worrying: its public debt is seen jumping from 44 per cent in 2007 to 71 per
cent by 2010. Even the combined budget deficit of the euro zone—the world's
most disciplined region regulated by the Stability and Growth Pact—is expected
to more than double this year, and the public debt of 15 member states will
swell to 73 per cent of their GDP in 2009 and to 76 per cent next year.
Hungary does not stick out like a sore thumb, but government bonds
underpinning its public debt must compete with bonds denominated in euros
and dollars, as well as with British or American government securities. It is
hard even for Irish, Greek or Spanish bonds to keep pace with such
competition. The European Central Bank takes their bonds as collateral in
exchange for credit. No such luck for EU members outside the euro zone. No
wonder both former Prime Minister Ferenc Gyurcsány and the opposition's
likely candidate for prime minister Viktor Orbán raised a cry urging a level
playing field. This would not go amiss: Hungarian bonds were nigh on
impossible to sell for many months since October last year. (It was only in April
that Hungary finally braved the market with a sale of medium-term government
bonds.) Without its 20 billion euro credit line from the International
Monetary Fund and the European Commission available until March 2010,
Hungary would have had to shut up shop.
Has Hungary been blackballed by the global financial community? Almost.
It is a fact that ever since Iceland's spectacular collapse the forint and
Hungary's situation has been steady fodder for the world's press. And this is a
problem whether they worry or promise help. Obama did both. It is just that
some of his remarks got less coverage than others. In both cases, the forint
stands to fall. Neither Hungary's budget deficit at 3 per cent of GDP nor its
public debt at just above 70 per cent—high, but not excruciatingly so—fare too
badly in a global comparison. So what's our problem?
[...]
Hungary and the IMF
Hungary will have little choice other than to extend its loan with the International
Monetary Fund. At the spring financial summit in Washington, 25–26 of April, a
correspondent for business weekly HVG heard the organisation's leaders say that the
Fund would not leave the vulnerable region of Eastern Europe in the lurch.
Here the real catastrophe is only just beginning. Anyone who got a glance at the meeting
of the IMF and World Bank last weekend was not left in any doubt about that. This year, the
recession will surpass 10 per cent of gross domestic product in the three Baltic States.
Because their local currencies are pegged to the euro, wages will slide by a similar ratio. The
IMF predicts that the Czech Republic and Slovakia—both more competitive than Hungary—
will get through the year with economic slumps of 3.5 per cent and 2 per cent respectively
(both countries' leaders had hoped to escape a recession only a few months ago). The IMF in
its latest World Economic Outlook cheerfully forecasts a 3.3 per cent contraction of Hungary's
economy in 2009. But appearances are deceptive. No one in IMF circles in Washington
feigned ignorance of the source of this weird optimism: during the March review of Hungary's
bailout programme, the Finance Ministry balked at forecasting a bigger contraction lest the
country's budget deficit target for this year of 3 per cent of GDP should be put at risk.
(A deeper recession, of course, means less budget revenue and an automatically higher
deficit.) The Bajnai government, which came into office in April, plans to reconfigure the
public finances accordingly. At the meeting, Finance Minister Péter Oszkó and Central Bank
Governor András Simor personally briefed IMF and World Bank leaders of the latest corrections,
which include welfare and pension changes as well as modifications to tax policy.
It was a little over a month ago that the IMF's delegation reviewed the government's
November programme and approved the second tranche of the loan, worth I 2.4 billion,
after disbursing the first tranche of 4.9 billion. Three parts of I1.5 billion each are still
available for refinancing foreign-currency debts and strengthening the banking sector
until the programme's expiry in March 2010. The latter guarantees the Hungarian state
the ability to get through this period without a penny of new financing. The question is
what will happen later. An increasing number of experts think that if the financial crisis
fails to ease, the loan's deadline should be extended or a new pact agreed with the IMF,
since it would be too early to allow the market alone to shape Hungary's state financing.
This is something that the IMF leadership probably anticipates as well, knowing that the
crisis has hit the Eastern European region especially hard. To make matters worse, the
world's largest countries are only now beginning to pile up their own enormous public
debts, arising from a combination of dwindling revenues, bank bailouts and economyboosting
spending. These require financing too. So the states of Eastern Europe too are
likely to face a disturbing lack of financing after 2010. "The global economy will begin to
recover in 2010 and the credit squeeze will ease, provided that governments' economic
stimulus programmes work," Jörg Decressin, Chief of the IMF's World Economic Studies
Division, told HVG. So far the IMF has granted some $78 billion worth of loans to this
troubled region, almost the same amount as they granted to all needy countries
combined during the 1998 Asian crisis.
Lately, the IMF has become more and more lenient with its debtors. During the review
in March of Hungary's programme, its experts were not insistent about it sticking to the
3 per cent budget deficit goal at all costs. But the government did not want to risk any
slackening, keen as it is to avoid European Union procedures for excess deficits and to
concentrate in earnest on adopting the euro. "The costs of a higher-than-anticipated
recession must be weighed against the risks of stimulus," IMF chief executive Dominique
Strauss-Kahn told HVG on the press conference. "It was a very challenging moment (when
Hungary turned to the IMF), but in a difficult time, you may be aware that we recently had
our first review of that arrangement, and were able to move forward with some additional
funding for the Hungarian economy. We're hopeful in a difficult time that we can provide
adequate support", IMF's first deputy CEO John Lipsky added. And indeed. Some weeks
later, at the second review of the Hungarian programme in May, both the IMF and the
European Commission accepted some fiscal easing: the new deficit target for 2009 is
3,9 per cent of GDP and 3,8 per cent for 2010, not to freeze the economy completely.
The IMF, which in 2008 had been suffering from budget and staff cuts, managed to
renew its entire arsenal in six months so that it could engage new sources and loan
constructions. Based on a decision made at the G20 summit in London, the IMF will grant
$250 billion worth of Special Drawing Rights (SDR), its own "currency". Of this, Hungary
will receive some $1.2 billion worth of funds which can be drawn on unconditionally and
can be used towards boosting foreign currency reserves. A further 221 million SDR ($332
million at current rates) is also available if member states finally approve a policy mooted
many years ago to grant members reserve currency who had never received SDR, among
them Hungary, which joined the Fund in 1982. On top of this, the IMF may draw in new
sources of up to $500 billion, although it is not very clear at this point who might donate
this sum. "We'll manage it by the end of the year," Strauss-Kahn said with confidence, who
described the new policy, using IT terminology, as IMF 2.0.
Among its latest innovations proudly cited, IMF has already launched its so-called
flexible credit line, more of a kind of insurance than a loan and can only be granted to states
that run a rigorous fiscal policy. But they can get it fast and almost without conditions in
order to contain troubles due to market disturbances beyond their control. First Mexico,
then Poland appealed for these funds, though Polish Deputy Finance Minister Ludwik
Kotecki hastened to state that it is not likely that the money would actually be used. Hungary
is not yet eligible for the loan the Poles have earned, and is receiving a "traditional" standby
credit line instead. In response to HVG's question whether this could be converted into a
flexible credit line if needed beyond the expiry date of March next year, European Director
at IMF Marek Belka said "the latter requires demonstrating outstanding fiscal progress". In
other words no—or at least not as things stand today. Z. F.
[...]
Zoltán Farkas
a journalist, is section head on the economic weekly HVG.
