Fatal First Steps

Is Hungary already spinning out of control?

No sooner had the new right-wing government of Victor Orban assumed control in Hungary than the country was confronted with a major financial crisis. The Hungarian Forint (HUF) dropped precipitously, creating panic at home and abroad. The European Union (EU), still reeling from the financial crisis in Greece, now had another major crisis to worry about.

The crisis was sparked by two senior members of the ruling FIDESZ party, Lajos Kosa and Peter Szijarto, both of whom who on separate occasions had noted in public that the country was on the brink of bankruptcy. Kosa, who got the ball rolling last Thursday, compared the financial situation in Hungary to that of Greece; Szijarto merely reaffirmed this position on Friday.

Foolhardy comments

In this day and age comparing a country’s fiscal health to that of Greece is as low as you can go. Ironically, at the same time that leading members of the FIDESZ had spooked financial markets with the dreaded Greek Curse, Orban was in Brussels holding talks with the European Commission, promising a swift action plan to bring Hungary’s fiscal house in order. If what had transpired last week was part of this swift action plan then Orban’s government would perhaps do better to take more time and think things through rather than resort to making rash decisions and comments.

Pundits in support of the new government admit that the comments made by Kosa and Szijarto were “unfortunate”. Still, what is puzzling is why these politicians had made these comments in the first place. Both Kosa are Szijarto are not new to the game of politics and are thus well versed in how to be economical with the truth – or at least they should be. Kosa, who is also the mayor of the eastern town of Debrecen, occupies a rank within the upper echelons of the FIDESZ; Szijarto is presently the government spokesman and was the party spokesman when the FIDESZ was in opposition.

Given the framework under which the IDESZ operates, it’s hard to imagine that such comments weren’t made without the prior knowledge or permission of Orban. For those familiar with the inner workings of the FIDESZ, the party is strictly hierarchical with Orban in firm control at the top. Indeed, the new Hungarian government appears to have been organized in such a way so as to reflect this structure.

Hiding “skeletons in the closet”

Without a doubt, these comments were made in anticipation of a report that was to be made public on the weekend by the new government’s much hyped commission investigating the true state of the economy. As was expected, this report claims to have found many inconsistencies and creative tricks used by the previous government to mask the true state of the country’s financial health. At the core of the findings by the commission is that government debt, which is slated for 3.8% this year, will be much higher.

This seemed to reinforce the position the FIDESZ made during the election that the previous government was hiding “skeletons in the closet” and that upon assuming power it will make sure that these would be duly revealed. Yet while the FIDESZ claims to have found some fragments of bone, these are nonetheless a far cry of having found a complete carcass – and a Greek one at that.

Not only this, much of what the new government claims to have found is actually not that new. What the commission presented over the weekend was information that was publicly available; the data hidden in the actual balance sheets has yet to be revealed. Experts estimate that it will still take weeks or months before forensic bookkeeping will reveal everything. For the new government, which is keen on portraying an image of quick and decisive action, waiting for such a long time is not an option.

Hence, what seemed to have transpired over the weekend was nothing more than an elaborate publicity stunt. Outside observers, including the IMF, were already well aware that the Hungarian debt target of 3.8% would be higher. Not only this, higher government debt is not necessarily indicative of state insolvency. All this, therefore, doesn’t justify the comments made by Kosa and Szijarto.

While the comments made by Kosa and Szijarto have been regarded as reckless and something which had led to panic on the financial markets, what happened toward the end of last week was in actual fact simply part of an ongoing process, albeit it had accelerated somewhat faster than expected. The HUF has been sliding slowly but surely downward, reaching levels close to that of 2008 even before the sharp plunge at the end of last week. Most people, however, have been unaware of this. The government and state media had done an excellent job of covering up what had been going on by focusing attention on the HUF to euro rate. Yet compared with other currencies (such as the Swiss Franc or US dollar), the slide of the Hungarian currency was quite obvious. In fact, the Canadian dollar had consistently broken new ground.

The important benchmark is not the euro but the Swiss Franc

For most Hungarians affected by the weak HUF, the important benchmark is not the euro but the Swiss Franc (CHF). The vast majority of loans in Hungary are CHF-based. During the heyday of goulash capitalism prior to the financial crisis, most had taken out CHF-based loans which stood at about 150 HUF per CHF. When the financial crisis hit in 2008, this rate went as high as 200, before easing back down to 180. The HUF-CHF rate is now at around 200 again.

The weak Hungarian currency indubitably has a direct effect on the Hungarian economy as personal debt becomes more expensive. Approximately 70% of all household debt in the country is foreign currency based, and these debts in large part run for 13-15 years. At present, about 10% of all debts in Hungary are considered bad, that is, payments have not been made for more than 90 days. With a further weakening of the currency, an additional 300,000 families are at risk of not being able to pay their foreign-currency-based loans.

Given this, the question remains as to why two leading politicians felt it necessary to make such foolhardy comments. Some feel that it was simply bad politics. If so, this isn’t be the first time that the FIDESZ had made such a catastrophic mistake. During the 2006 election, the party ran a campaign feeling that an emphasis on the negative was the best option. It turned out to be the worst; in the end, it cost them the election. In much the same way, some within the FIDESZ may have now felt that over-emphasizing the negative would somehow be advantageous. If so, this has been a costly miscalculation.

A carefully planned tactic?

Others, however, don’t believe that it was simply a case of ignorance on the part of two politicians or a miscalculation. Instead, they see it as a carefully planned tactic in order to justify the government not having to fulfill some of its election promises, such as tax cuts, and even introduce further austerity measures. One of the points of attack used by the FIDESZ while in opposition was that the government was only concerned with introducing austerity measures, and that if in power the FIDESZ wouldn’t rely on such drastic measures.

Still, there are some who feel that the entire episode was a case of cheap politics on the part of the FIDESZ. For the past eight years the party has been in attack mode against their rivals, the Socialists, and it appears that old habits die hard. Thus, news of a Greek skeleton in the closet has been used primarily to show how bad the situation really is thanks to almost a decade of Socialist rule, and that if the country now slides further into the abyss it is because of the past and not the present.

If this latter explanation for what happened late last week is indeed the case, then it was a very cynical move on the part of the new government, indeed. In any case, many will now bear the brunt through a higher cost of debt as well as increased consumer prices. Considering that the country has become addicted to imports, including food, a substantially weaker currency will also trigger a marked rise in inflation.

Yet it’s not only the people over whom the government rules who have been adversely affected by what happened, but the FIDESZ itself. From the beginning the image that Orban had tried to portray of himself and his government was one of an administration in control of the situation, taking quick and decisive steps. His government was also one of experience, having ruled the country from 1998-2002.

Reality check for the new government

This image has since been shattered. For one, Orban’s stance during the election that they would re-negotiate the country’s agreements with the IMF, as if his government would do so from a position of strength, has been considerably weakened. In fact, the FIDESZ had maintained that the previous government’s debt target of 3.8% was unsustainable and that a new debt and more realistic (i.e. higher) target would be put in place. Over the weekend the Finance Minister, Mihaly Varga, contradicted this position by insisting that they would keep to the original target. This has led many to become skeptical of the new government: despite the tough talk prior to the election, everything appears to be carrying on the same as before, albeit in a slightly different way.

This image of a government not in total control of itself has only been reinforced by previous foot-in-the-mouth blunders. For example, during the election Laszlo Kover, who is also a senior member of the FIDESZ, had mentioned that the new government won’t be able to introduce tax cuts right away. Orban had to quickly contradict him the next day by assuring the public that “trust me, there will be tax cuts.” Likewise, Orban's attack against the head of the Hungarian National Bank (MNB) immediately following the election proved to be ill-timed.

In the end, whether or not the events of late last week ultimately turn out to be a flash in the pan will depend largely on what is said and done in the coming days. Perhaps the enormous electoral success wrought by the FIDESZ last month had gone to the head of Orban and others, and the “market correction” on the HUF served as a reality check for the new government. In any case, for the right-wing in Hungary the solid foundation upon which they have based their “revolution in the voter booth” has turned out to be not so solid after all.