Archive for May, 2010

Is it Worth Fighting With a Central Banker?

Hungarian Prime Minister-designate Viktor Orbán and his Fidesz party have launched a series of verbal attacks on National Bank of Hungary (NBH) Governor András Simor over the past few weeks. As Political Capital had warned, Fidesz’s plan to “conquer” the central bank from Simor was in the works long before the elections.

Once the elections were in the bag, Orbán went straight from the frying pan into the fire. At an international news conference April 26, Orbán labeled Simor an “offshore jouster,” a reference to the central banker’s offshore business dealings. We have analyzed what constitutional or technical instruments a government would need to replace a central banker. Now I would like to ask: Is it worth it?

Before the elections, the markets were optimistic about Orbán’s expected victory. The future seemed rosy – a stable government with a strong devotion to economic and fiscal discipline, despite the political conundrums of the campaign. Then came the surprise: First, international coverage of the elections did not focus on Fidesz’s historic two-thirds majority in Parliament; rather, the headlines played up the electoral successes of the ultra right-wing Jobbik party. A second blow hit Fidesz when foreign journalists at Orbán’s first post-election news conference emphasized his remarks on Simor instead of his political and economic plans. Reporters and market analysts focused on only one thing: how the war with the central bank would affect Hungary’s financial stability.

So Orbán’s first international appearance after his historic ballot-box victory brought controversial results. Since then, Fidesz and even Orbán have somehow moderated their words on the governor, but uncertainty remains. Unfortunately, this uncertainty can easily become a risk factor at a time when market players are nervously watching events in Greece and predicting the collapse of the Eurozone. The forint has already started to tumble against other major currencies; some analysts say the war between the government and the central bank might increase the forint’s vulnerability.

To be fair, Simor made several mistakes. Though he did nothing illegal when he transferred part of his wealth to the sunny island of Cyprus, global investors can hardly consider it reassuring when the person who is responsible for the stability of forint evacuates his money to… well, let’s call it a “tourist resort.” In preparation for the war with Fidesz, Simor hired a highly controversial figure to be his communications consultant, giving more ammunition to the hitmen in the pro-Fidesz media. Simor explained his choice by saying the the NBH needs ‘brand management’. For God’s sake, the central bank is not Toyota or BP.

Nonetheless, I recommend both sides stay calm, or at least keep the fight behind closed doors, not in front of cameras. What Hungary needs is a relaxed environment. The country has plenty of problems to cope with. The last thing it deserves is an exchange-rate crisis or a downgrade by international credit-rating institutions.

Krisztian Szabados

Greece: The Dark Side of Hungary?

If Lehman Brothers had collapsed in the autumn of 2006, Hungary could easily have found itself in the same boat Greece is in right now. Hungary’s international credibility crumbled after the 2006 budget deficit turned out to be 9.3% of GDP, the highest in the EU and double what had been forecast. Prime Minister Ferenc Gyurcsány, who had just won re-election in April 2006, abandoned his campaign promises and introduced austerity measures. Then, in September, Gyurcsány was caught on audiotape admitting he had deliberately lied about the state of the economy in order to win the elections (the infamous “Őszöd speech”). The ruling Hungarian Socialist Party lost more than a third of its voters in the space of four months.

Today, it appears Hungary has come out in one piece, despite some “hot” moments in 2008-2009. Yet the spectre of “Greece-alization” still haunts the country. Greece is an excellent compass for Hungary – to know which way not to go.

The parallels between the two countries are striking. Both Greeks and Hungarians consider tax evasion national sport – tax dodgers drain between a quarter and a third of Hungary’s GDP from the tax base, according to estimates by the National Bank of Hungary. Since both countries were occupied by foreign forces for centuries, the tradition of “stiffing” the authorities and hiding income is ingrained in society. Rampant corruption (or at least the perception thereof) undermines citizens’ willingness to pay taxes in both countries: They are reluctant put their money in a “leaky bag.” Both the Hungarian and Greek tax systems are too complicated for the average citizen to grasp, which further encourages tax evasion and avoidance – and the temptation for cheating grows even stronger if there are loopholes in the system. Both countries’ governments are guilty of “permanent tax reform” – tinkering with the tax system every one or two years. This exacerbates the problem because taxpayers, companies, accountants and even tax authorities are unable to keep up with the changes. In Hungary, only an extensive, long-term tax overhaul can solve this problem. But there are justified fears that the incoming government will continue the policy of “minor alterations every year” in an effort to produce some short-term successes.

Further political radicalisation seems almost unavoidable for Greece, as we mentioned in our May 6 analysis. Forces on the extreme right – and especially on the extreme left – may gain popularity at the expense of the centrist government and opposition parties. An extreme lack of trust in political institutions and the political elite is a common feature in both Hungary and Greece. Hungary’s incoming government, led by the Fidesz party, will have a chance to weaken radical-right forces if people perceive it as successful. However, the Greek crisis may severely restrict Fidesz’s fiscal room for maneuver; for example, the International Monetary Fund and the EU may no longer be inclined to let Hungary raise the 2010 budget-deficit target in its standby loan agreement. This will make it tough for Fidesz to to improve living standards quickly, which is what many of its voters expect. Since Gyurcsány’s Socialists have completely lost their credibility as a governing force, disappointment in Fidesz can easily push voters towards the ultranationalist Jobbik, a system-critical party that hasn’t been discredited as a government force yet.

Peter Kreko

Categories: Crisis, Greece, Hungary