Short version: the new, center-right Hungarian government is reviving the plan to offer Hungarian citizenship and passports to ethnic Hungarians living outside Hungary. (There are a couple of million of them. Most live in Hungary’s neighbors Romania, Slovakia and Serbia, with smaller numbers in Croatia and Ukraine.) Stratfor sees this as “an insurance policy â€” a way of broadening [Hungary’s] power and securing itself should its protectors, the European Union and NATO, weaken.”
A sad story from the edge of Europe last week: fifteen Kosovar Albanians died trying to cross the border between Serbia and Hungary. The border there is a a river, the Tisza, which is a large and swift-flowing tributary of the Danube. The Albanians were illegal immigrants trying to move from Kosovo into the EU. Their boat capsized and most of them drowned. The immigrants seem to have been family groups, and the dead include at least two children.
Kosovo declared a national day of mourning last week. Serbia, which still claims Kosovo as part of its territory, made no official statement.
It’s a very sad incident that points to some realities in the region.
As I have just indicated in my last post Hungarians went to the polls yesterday in a vote over whether or not to scrap government-imposed fees on visits to doctors and hospitals introduced as part of a belt-tightening adjustment programme, designed to bring what was at the time of its introduction the EU’s largest fiscal deficit back into line with Commission criteria. The referendum, as was well to be expected, resulted in a resounding defeat for the government, and with 94 percent of the votes counted, each of the three questions placed on the ballot received 82-84 percent support, according to data from the national election office OVB. As I say, to the intelligent observer this result should not have been entirely unexpected – the reason being, as I suggest in my previous post, that Hungary’s citizens may well now be suffering from what could best be described as a severe bout of “belt tightening fatigue” – and the outcome may may well initiate a period of political instability in Hungary (signs of a rift between the ruling Socialist – MSZP – Party and junior coalition Free Democrats – SZDSZ – partners were only too evident in an inadvertent moment yesterday, captured live for all the world to see by HirTV) and Prime Minister Ferenc Gyurcsany’s administration will need to struggle hard to maintain the credibility and integrity of its economic adjustment programme in the referendum aftermath, while “punters” in London meticulously dedicate themselves to trying to short HUF denominated assets to the best of their ability (that is when they are not otherwise entertained trying to short the Spanish Banks or Italian government debt). Continue reading →
Question: how would you have known they were holding a referendum on the government’s difficult and unpopular economic adjustment package in Hungary on Sunday? Answer: just take a look at what happened in the Hungarian financial markets last Friday.
It should not have been too difficult to see all this coming, yet financial analysts seem to have been strangely silent on the potential implications of the latest political twist in Hungary’s ongoing economic agony. And where they have not been silent they have generall been trying to downplay the referendum’s importance. Only last week Goldman Sachs’ Hungarian analyst IstvÃ¡n Zsoldos was busy reassuring us that the coming referendum would have no lasting impact on the evolution of Hungary’s long drawn out economic crisis (although he did admit that the short-term political noise was â€œlikely to intensify”). I beg to differ. I think the consequences of Sunday’s vote are going to be important and long lasting (indeed I had the referendum pencilled in in this post as the third of my potential tipping points for Hungary’s economy, with the the second one being the last interest rate setting meeting of the central bank, when, of course, they did scrap the currency band), and they are going to be important and long lasting regardless of whether or not the Hungarian authorities manage to plug the now growing breach in their credibility and the value of HUF denominated instruments in the short term. Continue reading →
Who knew Hungary has an entire shopping centre devoted to Chinese-owned businesses? Der Standard reports on the “Asia Centre” in the 16th district of Budapest, home to a community that has made Hungary the biggest entrepot for Chinese goods in central Europe. Last year, $4bn of Chinese exports entered Hungary, of which two-thirds was re-exported. The centre is 90 per cent utilised and is going to expand. Not entirely surprisingly, its owners are the Austrian construction group Strabag and the Austrian mutual banks’ investment arm, Raiffeisen Investment AG.
Apparently, there may be as many as 60,000 Chinese in Hungary, the flourishing legacy of a botched late-communist trade agreement. In order to keep up appearances after the two sides failed to agree anything substantive, they ended visa requirements between China and Hungary. This came into its own a year later, when large numbers of people quit China after the Tiananmen Square massacre and arrived in a Hungary that was about to be the first mover in the wave of revolutions. Originally, their businesses shot out of the ground around the eastern railway station’s freight yards. Later, the Austrian investors built the new centre.
Hungary, as readers of this blog well know, is struggling with a large budget deficit and a terrible balance of payments problem, which has led to a certain amount of trouble. Specifically the fighting in the streets kind. Now, the Socialist government of Ferenc Gyurcsyany came up with a simple plan to cut the deficit from 10.1 per cent of GDP to something more reasonable.
Essentially, he decided to tax the rich until the pips squeaked. More accurately, he decided to tax industry until the pips squeaked, introducing a new 4 per cent “solidarity tax” on company profits. During the Chinese civil war, one of the more depraved warlords used to levy a “Happy Tax” on the unfortunates who lived in his territory – the taxpayer was meant to pay up and be happy. Presumably Hungarian businessmen are expected to do something similar.
Doh! On one level, I suppose I should be sympathetic to the Hungarians because they are being pushed around by an arrogant German multinational. On another, though, you can’t deny that this is a really incredibly stupid policy. Hungary’s biggest economic success has been its fast-growing export manufacturing sector, concentrated around Gyor. And it’s only that sector that is making an impact on the current account deficit. After all, if you don’t increase exports, the only way you can reduce a current account deficit is to reduce imports, which means reducing the standard of living…
It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:
For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.
The warning lights are flashing again â€“ this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.
Gyurcsany said that Hungary had managed to keep its economy afloat only thanks to “divine providence, the abundance of cash in the world economy and hundreds of tricks……I almost died because for a year and a half, we had to pretend that we were governing. Instead, we lied in the morning, in the evening and at night. I don’t want to do this anymore,”
As the article concludes by saying “Hungary’s 2006 budget deficit is now forecast to reach 10.1 percent of gross domestic product, compared with the government’s pre-election target of 4.7 percent.”
“Everybody in Hungary knows that real income will decrease in the next two years … and very significant social groups will feel their interests hurt. If this simple rejection is transformed and mixed with national radicalism and social populism, then this is a dangerous thing,” Gyurcsany (Ferenc Gyurcsany, Hungary’s Prime Minister) said.
He has said that Hungary aims to meet eurozone criteria on the public deficit, national debt and inflation by 2009 and adopt the common currency by 2013.Last week, Hungary submitted to the European Commission a revised plan to prepare for adoption of the euro. Under the plan, the public deficit would be slashed from 10.1 percent of gross domestic product GDP) this year, the highest in the EU, to 3.2 percent in 2009. Although it is an ambitious programme, some analysts have called on the government to cut spending further in social areas such as pensions, in order to tidy up the country’s shaky finances, a recipe Gyurcsany has so far rejected.
The so-called euro convergence programme, not deemed aggressive enough for some, has also sparked protests in Hungary and led to a huge drop in the government’s popularity. The reforms include ending free public university education and overhauling the state-run healthcare system that is teetering on the edge of bankruptcy, by introducing co-payments for visits to the doctor and to the hospital, among other things. The aim of the plan is to put a greater financial burden on citizens and curtail the welfare state, which is becoming increasingly hard to finance in a society that, like much of Europe, is growing older.”
Because they devalued the forint this summer, so everything is now about 7% cheaper.
Well, they didn’t actually devalue it. No. I mean, that would imply there had been a… devaluation. Ha ha, how silly. No, what happened was that the Bank of Hungary moved the band in which the forint was allowed to float freely. Whereupon the forint freely floated down from around 250/euro to more like 275/euro. So, it was a sudden fast downward change in the value of the currency caused by central bank action. Which is not a “devaluation” at all.
(The forint lost about 10% of its value in a month; you can see the graphic here. It has since clawed back about a third of that loss. Still, a Euro will go about 7% further than it would in May, and about 10% further than in March.)
Nobody seems to have paid much attention, but I think there are some points of interest here. Continue reading →