Is Hungary Also Distancing Itself From the IMF?

So many things are so unclear at the moment. What attitude does the IMF actually have towards the current Latvian bailout programme? Is there really a “spat” taking place between the EU Commission and “the Fund”, and just what is going on in Hungary? In fact, I have a longer post going up later on today which will ask just this very question, but in the meantime, we could ask why the Hungarian Finance Ministry was so happy to pay 6.79 percent to sell one billion euros worth of bonds last Friday, considerably more, for example, than the the 5.9 percent on existing euro-bonds due May 2014, and more than they would pay the IMF for the forthcoming tranches of their loan.

Hungary sold its first debt to foreign investors since last year’s International Monetary Fund bailout, taking advantage of the world’s strongest bond market rally to borrow 1 billion euros ($1.4 billion). Investors ordered 2.9 billion euros of the securities, nearly six times the 500 million euros the government initially planned to raise, Finance Minister Peter Oszko said in an interview today. The government lured buyers by offering a yield of 6.79 percent on the five-year debt, more than the 5.9 percent on existing euro-bonds due May 2014.

According to some this sale was a huge success:

“The transaction has a very positive message,” said Gabor Orban, head of fixed income at Aegon Hungary Fund Management in Budapest, who manages about 3 billion euros of assets. “Hungary is able to return to market financing, both in forint and euros.”

But the explanation may be far more complex. According to Portfolio Hungary this morning, it is now possible that the next tranche of the IMF credit facility due in September will be drawn by the central bank and not the Hungarian government (citing András László Borbély, Deputy Chief Executive of Hungary’s Government Debt Management Agency – AKK). If this were to be the case the next time the government would need to resort to the IMF’s stand-by arrangement would be in 2010. On the other hand, the next tranche of European Union’s share of the bailout would still be drawn.

Now perhaps if I were not so focused on what is happening in Latvia nothing here would strike me as odd. But there is a pattern which does seem to be repeating itself, with both Latvia and Hungary ceasing to be dependent on IMF funding. In fact the 1.43 billion euro June tranche of the IMF loan was already drawn by the National Bank of Hungary and not the government. The key difference is that when the NBH draws on the credit facility, the money drawn does not increase the level of government debt, although it does raise the stock of foreign exchange reserves, and thus provide added protection against speculative attack. The loan on the one hand cannot be used to finance the budget deficit, but on the other the IMFs hand is weakened in negotiations about structural reforms etc.

András Borbély is even quoted as saying that it is possible Hungary will not need not to resort to any more IMF help this year, as its access to market-based financing has increased given the successful Eurobond issuance last week, which could become a substitute for the next IMF tranche of about EUR 1.5 bn due in September. At the same time, the government is still planning to draw on the credit facility made available by the European Commission. So is it just me, or is there actually an institutional backdrop to all this? Certainly having the IMF take responsibility for EU states never made a great deal of sense to me, but with the EU Commission now assuming a large chunk of Latvian sovereignty, and with the same possibly about to happen to Hungary, not to mention other CEE states, and Ireland, Greece and Spain, are we not, perhaps on the point of witnessing an epoch making tectonic shift in EU institutional architecture? And all without anyone visibly being aware that it was in fact taking place.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

12 thoughts on “Is Hungary Also Distancing Itself From the IMF?

  1. I think the answer is very simple – normally I don’t like conspiracy theories, but in this case they seem justified. Elections, which will be won overwhelmingly by the right, will be held in April 2010. The IMF and EU loan packages come up for renewal in March. The right has said it will not abide by the terms of an IMF loan if this doesn’t suit, but for political reasons they would have more difficulty with an EU one. And the EU would want Hungary to continue current policies. It would suit the current government – which is basically a government of the financial elite – to tie the hands of its successor by having the EU impose the same conditions of week-to-week supervision of government fiscal policy by Brussels. The new government would have no alternative but to either follow the terms of the new loan and accept the complete loss of national sovereignty, or turn it down and default. Given the past behaviour of FIDESZ, especially if the far right do very well, this is probably what it may do.

  2. What the reason that the right will win the elections in April 2010? In Latvia there is enormous shift to the left, already shown in local and EP elections.

  3. Oh, I think this is just a question of incumbents Govs. In Latvia the left is in opposition, in Hungary it is in government. Since the current measures are very unpopular with the general population, the left benefits in Latvia and the right in Hungary. Just democracy at work really.

  4. Of course, I could have added that in both cases the policies being implemented are the same, those advanced by the EU and the IMF.

  5. govs,

    in Hungary right is left, but more importantly, right is in the opposition now.


    isn’t the goal of EU/IMF programs to help countries to restructure and then go back to normal financing?

    Hungary had no issues in negotiation with IMF, every trench was agreed successfully and country was able to go back to markets. In my opinion, the goal of the government is to get back completely to market financing, having agreement with IMF for a “reserve fund” in case things go to worse. Fidesz will do their bla-bla, but actually nothing will change.
    I don’t see similarities with Latvia’s case where there is no agreement with IMF since March.

  6. Ohh, already vertigo from looking left and seeing right.

    Blue Monk, Hungary is much bigger and more important for Angela. The importance of size has never been too small: even Soviets did not invade Poland, as they invaded CZ and HU.

  7. govs from Latvia,

    Basically this is the situation. The dominant reaction to the economic crisis in Hungary is that people think the country has been sold out to foreigners, and a nationally assertive government is the way out. FIDESZ is a statist-nationalist party (more like Peronists in Argentina than conservatives elsewhere). It will win easily, and two opposition parties – the Socialists and Jobbik (the far right) – will win similar shares way behind FIDESZ. The logic of this political situation is that FIDESZ will not be able politically to continue current policies both because of how it has presented itself, and because of the strength of Jobbik.

    Blue Monk,

    Perhaps this is the goal, but I think it is unachievable. More important is that they are implementing the Slovak solution that reform economists and business interests have argued for for years, and they want to preserve this from being undone through the elections.

  8. New European,

    “they want to preserve this from being undone through the elections”

    Nobody wants to undo things after elections. Fidesz will probably undo only maternity benefits and real estate tax, which are only minor part of the program.

    If the country returns to the markets, then next government will have less pressure from EU/IMF bureaucrats, it would actually be easier for them to “undo” things.

  9. Hi Blue Monk:

    “Fidesz will probably undo only maternity benefits and real estate tax, which are only minor part of the program.”

    Do you mean it is actually part of their programme to encourage Hungarians to have less children?

  10. No,

    more precisely, they would undo shortening of maternity leave and benefits from 3 years to 2 years, which is part of current government’s program. This is cheap to revert as its fiscal price in short term is very low(maybe 1-2 billion HUF), but would be popular. The goal of the shortening is to increase female participation in labor market.
    Otherwise, 3 years of benefits seems pretty generous. If it would be effective as well, Hungary would probably not have low birth
    rate. But it is not effective…

  11. OK, well this is one Fidesz measure I am definitely in favour of, even if I am in no way one of their supporters. Maybe this measure is not effective, but it needs to be replaced with more effective measures, not weakened. And on my view this needs to be a national spending priority, whether the IMF can see that or not.

  12. I don’t think it has to do with IMF, maybe more with EU, the commission was suggesting it in 2006. Every measure which is part of the program was discussed in different forms for few years in Hungary, some of them maybe even implemented earlier in a more moderate way, but know that crisis is here it is “easier” to go on politically. The program is actually a collection of policies which were prepared for some time, countersigned by IMF/EC.
    Where IMF’s “expertise” comes, is in field of financial stability, that part of program is real collection of bureaucratic “solutions”

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