George Bokros Goes Live On Hungarian TV

Now I am not either an unreserved, or an uncritical admirer of George Bokros, but I do think he talked a lot of sense when he went on Hungarian TV this morning. The Hungarian banks are no longer at risk, they are guaranteed by the Hungarian State. It is the Hungarian State which is now at risk, since ultimately it is the state who is going to have to underwrite all the debts. This is why you need full IMF support, urgently in my view. Get in there first, before you have to wait your turn in the queue behind the rest of them.

I don't mean to create panic, but chances of a national bankruptcy and a currency crisis are bigger than of a banking crisis in Hungary, said Lajos Bokros, Chief Operating Officer/Professor of the Central European University (CEU), on Friday.

Hungary's former Finance Minister told public television on Friday morning that, in theory, there are three kinds of crisis: fiscal, bank and currency crises. Fiscal crisis is when a state is unable to finance itself, it cannot renew government papers or acquire funds to cover budget spending.

Bokros believes chances of this scenario and of the forint being blown away are higher than of banks going bust. Bar Hungary's largest bank (OTP) every major financial institution in the country is in foreign hands, he noted.

While the big, well-capitalised parents of these banks may incur losses, it will be their shareholders rather than the deposit holders that will get the short end of the stick, Bokros added. Bokros said he would not be concerned about the fluctuations in OTP's share price either, as stock prices always have ups and downs.

Bokros noted that savers are secured by the Deposit Insurance Fund that has enough capital to guarantee bank deposits. He is less upbeat about the situation of the state (and the local currency), saying that - without any intention to induce panic - a fiscal crisis could hit more easily. Bokros said the structure of the budget is bad and due to mistakes made by the government Hungary meets none of the Maastricht criteria (needed to join the euro zone).

Therefore, speculators regard Hungary as the most vulnerable in the region. It is the only country of the ten EU newcomers (that joined the block in 2004) with government debt at 66% of GDP, he added.As Slovakia is to adopt the single European currency in January 2009, speculators have been avoiding it (the SKK has not produced so heavy swings during the crisis, either). Bokros urged further spending cuts and a reform of the tax regime. Tax rates may be reduced only if the government manages to boost the number of taxpayers, he said.

Bokros As Hungary's Cavallo?


Domingo Cavallo is perhaps best known to economic history as the financial supremo who leaped to the headlines during his term as Argentina's Economy Minister in 2001 when he battled with the looming economic crisis which finally burst in January 2002. On 23 November 2006 I published the post which follows on this blog. So when people tell you that what is happening now could not have been forseen, don't believe them. I could see this coming, and I don't think I was the only one.


(Not everyone of course shares this view and an alternative point of view on Domingo Cavallo can be found here).

As Robert Barro noted:

In March, 2001, President Fernando de la Rúa's new Economy Minister, Ricardo López Murphy, failed when a reasonable program of curtailing public spending hit a political roadblock. Now there is talk in the markets of default on Argentina's foreign debt.

Out of desperation, the President has turned to his political rival, Cavallo, to save the economy a second time.

Now it seems Lajos Bokros is offering himself for a somewhat similar role in the context of Hungary's growing economic crisis. Of course, the parallels do not end there, since Cavallo was also the architect of Argentina's economic reform process during his tenure at the Ministry in 1991:

Things changed in 1991, when Domingo Cavallo took over as Economy Minister. His reforms were pro-market and featured fixing the peso at 1-to-1 parity with the U.S. dollar. He also pushed trade liberalization and reforms of public finance and the banking system. Despite the recession of 1995, induced by the Mexican peso crisis, Argentine per capita GDP grew at an average rate of 4.8% during the Cavallo years, through 1996.

And of course Lajos Bokros - currently Chief Operating Officer and professor of the Central European University (CEU) - was Finance Minister and father of an aggressive austerity package back in 1995:

Lajos Bokros, Hungary's former Finance Minister and the father of an aggressive but inevitable austerity package in 1995, said he would assume the position of Prime Minister if he was allowed to execute his own adjustment programme.

Bokros, who is currently Chief Operating Officer and professor of the Central European University (CEU), also said the country is in a political and moral crisis in respect of the fact that the governments which had been overspending and pushed the country into indebtedness can hardly ask for sacrifices from the people.

In an interview with weekly Heti Válasz, the former World Bank Director reiterated that Hungary needed a multi-insurance model in healthcare a market-based higher education and sweeping reforms in the pension regime.

With regards to the pension system Bokros said it could not be allow leaving one third of the population wrapped in cotton and let the working people carry all burden. The current system even encourages people to withdraw from the labour market via early or disability retirement, he added.

With respect to the tax cut plans of main opposition party Fidesz, Bokros said taxes would need to be reduced but that it could not be done without holding back spending more than presently.

At a conference of the central bank (NBH) Bokros said on Wednesday that what is currently hanging over Hungary is not the threat of bankruptcy or a financial crisis but the shadow of falling behind.

Growth is hampered by Hungary's huge twin deficit and the fiscal adjustment package will make Hungary the slowest growing emerging market next year, he added.

Bokros stressed the importance of structural reforms and pointed out the quality and availability of public services have been eroding, which undermines social solidarity.

Now the parallels with Argentina's situation in 2001 do not end here. Both countries share the problem of finding themselves on an unsustainable economic path, and in need of urgent measures which go beyond what the incumbernts are (or were) offering.

In Hungary's case Bokros is right to draw attention to the fact that tax increases will only add to Hungary's problems in terms of attaining the growth which is needed to support public services. He is also right that Hungary's health and pensions systems are at the heart of the problem.

But here the situations differ. Argentina had a currency peg, while Hungary's forint is, at least in theory, free floating. However since Hungary badly needs to retain foreign investment, and also needs to keep inflation in check, there is little alternative to relatively high interest rates, but these precisely (at least for the time being) maintain the forint at a relatively high level, which of course produces the same problem in exporting which Argentina suffered. These high interest rates also make the cost of servicing the government debt rather high, and this fact alone, as we have seen here, contributes to the difficulties in reducing the deficit.

The other big difference between Hungary and Argentina is the demographic one. Argentina was a comparatively high fertility developing economy, with, by and large, the phenomenon known as the demographic dividend out there in front of it. Hungary unfortunately belongs to that group of countries who went through a large part of their demographic transition before they became economically rich. As such the future lying out in front of Hungary is inevitably a complicated one, with or without the present economic conundrum. Fertility is at the lowest-low level (or see the file linked to here) and Hungary is set to age rapidly as the currently low life expectancy rises and rises. So the demographic changes which are facing Hungary involve more of a demographic penalty than a demographic dividend.

And Bokros is right to draw attention to the social spending dilemma which Hungary faces. He is also right that the pension and health systems badly need reform. The question is, as people enter a necessary private pillar, where does the money come from to finance the earlier PAYGO system, and how do you prevent the quality and availability of public services from eroding (which Bokros says he wants to do) if what you are going to do is reduce spending on them significantly? Somehow the numbers here just don't add up.

At the end of the day all comparisons are rather limited in their value. But what worries me most here is that I just can't see a sustainable path for Hungary to take hold of, and that, believe me, is the most worrying thing of all. Simply telling people that what they need is an austerity package if you have no clear idea of how the hell it can all work is only likely to mean that you end up as Cavallo did, only as I said Hungary isn't Argentina, and the end product of all this prevarication won't be a pretty sight.