Hungary the EuroPakistan & CB Disindependence

♠ Posted by Emmanuel in ,, at 1/01/2012 08:51:00 AM
It's time to get the IPE Zone show on the road for 2012! Honestly, though, I wish I could say the same for the Hungarian economy. For a bit of a background, do you remember the time prior to the outset of the 2008/09 global financial crisis when the Hungarian forint hit all-time highs against the euro? Those were heady days for speculation on emerging Eastern European economies during a period when due diligence was an iffier, more relaxed concept. Borrow a lot in euros--what's the problem there? Unable to sustain its gaping current account deficit in the wake of the crisis, it soon took out a €20B bailout from the EU together with the IMF.

With the replacement of the party that negotiated the EU/IMF deal, the centre-right party of Viktor Orban decided to go down the populist route by chastising the IMF for Hungary's woes. This politicization included telling these lenders to effectively beat it by turning down another tranche disbursal in 2010. Now, I would have been more impressed by this "sticking it to the man" display if, a few more months down the road, we find that Hungary could not do without and is again at the IMF's door asking for help. The scoreline? IMF 1, Orban the insubstantial faux-populist 0.

In the meantime, Hungary under Orban has been busy testing the EU and IMF's patience by attempting to consolidate Fidesz's political grip. In recent days, the Hungarians have dished out a tripartite whack job of what not to do in currying the lenders' favour.

First, in an era which champions central bank independence, how about Hungary pushing for central bank disindependence by making politicians choose key CB figures? The EU among others warned of this coming to pass, but it now has despite being in clear violation of the Lisbon Treaty:
Barroso was referring to the Hungarian government's plans to reshape the structure of the central bank by designating a third deputy governor and also raising the number of members in the Monetary Policy Council. The newspaper quoted National Bank of Hungary Governor AndrĂ¡s Simor as saying that these elements of the legislation could serve no other purpose than to increase government influence on monetary policy...

The Commission has serious doubts about the compatibility of the Magyar Nemzety Bank (Hungarian National Bank) bills with Article 130 of the Lisbon Treaty...[a]rticle 130 says that neither the ECB nor a national central bank, nor any member of their decision-making bodies, shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a member state or from any other body.
Second, there is concern about enshrining a flat tax into law depriving the country of flexibility for revenue raising measures which the EU and IMF will almost certainly seek if asked for help. Third, the Fidesz party is in the process of gerrymandering districts the old-fashioned way to ensure a firmer grip on electoral results.

Add all three in and it's quite a power grab by Fidesz. With formal negotiations for another loan disbursement due to start at the beginning of 2012, you have to wonder if Hungary can be forced to recant already-passed legislation. As the post title intones, today's Hungary is alike Pakistan: an economically misfiring entity that lurches from crisis to crisis. At the same time it is resentful of outside help yet insufficiently capable of resolving woes that drive it to external lenders time and again. While it may be fun to bite the hand that feeds, such gestures are empty if you eventually have to make nice with the folks you vilify since the essential problems remain unresolved.

Add in bonds downgraded to junk status, soaring bold yields and an abortive bond auction. Colour me unimpressed, Orban. Who do you think you are, the Eastern European Bolivarian?

3 January UPDATE: Confidence in Hungary's government is getting rather worse.