European financial markets were in for a bit of a surprise Monday as Hungary was not able to agree with the EU and IMF on conditions for the release of another tranche of its EUR 20 billion standby agreement concluded in 2008. Current Hungarian Prime Minister Viktor Orban of the right-of-centre Fidez party ousted the previous socialist leadership which negotiated the IMF deal. Orban had already been PM from 1998 to 2002, but lost at the polls in 2002 and 2006. As is often the case in politics, traditional notions of "left" and "right" do not always match when it comes to dealing with the IMF and other foreign interlopers. Whereas the previous government was obviously more amenable to making concessions--especially on the fiscal austerity front--the current government is not quite.
And so we have a populist backlash against the IMF. Ho-hum, where have we seen this movie before...
Hungary's government said the International Monetary Fund and European Union are ignoring the economic risks of excessive austerity measures and that Budapest can't make deeper spending cuts now, despite a punishing reaction from markets after bailout-loan talks between the two sides broke off this weekend.
The Hungarian currency, the forint, on Monday fell to its lowest level against the euro in more than a year, and the cost of insuring Hungarian government bonds against default jumped sharply after the IMF and EU walked out of talks with Budapest on Saturday, saying the government wasn't doing enough to shrink its budget deficit...
The new populist government of Hungarian Prime Minister Viktor Orban is trying to push back, arguing that further budget cuts risk stifling the country's nascent economic recovery. Hungary's gross domestic product is forecast to grow by about 0.6% this year, after contracting 6.2% in 2009.
"We've been through more than four years of austerity and that's why we have lost our competitiveness," Hungary's economy minister, Gyorgy Matolcsy, said in television interview Monday. "We told our partners that further austerity packages were out of the question."
Mr. Matolcsy also said the government planned to go ahead with a hefty new tax on [Western--see below] financial institutions aimed at raising nearly $1 billion to boost government revenue this year, despite concern from the IMF and EU that the measure would constrain economic expansion. "The only alternative to the bank tax is austerity," Mr. Matolcsy said. And that "would dampen growth more..."
If the government fails to strike a deal with the IMF and EU, it won't be able to draw on the remaining funds in a €20 billion ($25.9 billion) rescue package obtained in 2008, when it was unable to raise money amid a global credit crunch. Hungary hasn't drawn any money from the standby loan so far in 2010, and doesn't need funds to finance itself for the rest of the year.
Aside from not needing the IMF loans just yet, there are other reasons why the Fidesz party is undertaking this gambit. With local elections upcoming, a populist backlash may be just the thing to win votes and solidify a government majority. What's more, this backlash is further enhanced with revenue generation plans aimed at big (read: Western) banks while sparing indigenous firms that are of more modest size. Reuters has a neat Q&A from which the following are taken:
IS FIDESZ TRYING TO BUY TIME FOR LOCAL ELECTIONS?
Fidesz won a parliamentary election in April on the promise of generating growth and jobs through tax cuts, which appears to have been its only economic policy plan, analysts say. Global markets have taken a sour turn, however, and the government was forced to abandon its budget loosening policy. It has done so half-heartedly, and the programme it was forced to put forward in June reflects a resentment toward austerity.
Fidesz hopes to maximise popular support for the local elections on Oct. 3. Before ousting the Socialists from power in April, the party had won voters by campaigning against a series of austerity measures by the left. Coming out with such measures of their own would risk alienating swathes of the electorate. If they are to consolidate their power at the local level that will give Fidesz 3-1/2 years without an election, giving the government a freer hand.
Hungary's existing IMF/EU agreement will expire by October, giving Fidesz enough time to secure a safety net to fall back on. It remains to be seen whether the patience of markets will last another two months.
IS THERE A DANGER FIDESZ WILL RISK CONTINUED MARKET SELLOFF?
Yes, there is. Fidesz's popularity is rooted in a populist agenda that eschews austerity. To execute its agenda -- supporting families and small businesses at the expense of taxing banks and multinational firms -- Fidesz needs to control local governments. The breaking point will likely come soon after the local elections, which will coincide with writing next year's budget and the expiry of the current IMF/EU aid deal. If Fidesz does win local elections with a strong mandate, it can relax the populist agenda.
WHAT IS FIDESZ'S ECONOMIC PHILOSOPHY?
The party has proposed legislation to lower the tax burden on households and companies and wants the financial sector -- mainly banks with west European parents -- to foot the bill...Fidesz, which wants to distance itself from leftist governments of the past 8 years, loathes the idea of austerity for fear of being branded the same as the Socialists.
Its efforts to meet the 3.8 percent of GDP budget deficit goal centre on a financial sector tax. Fidesz's reluctance to introduce harsher spending cuts and its insistence on the bank tax strengthened its populist image among investors.
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