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Wednesday, October 22, 2008

Panic Gets A Grip On The Hungarian Authorities As Base Rate Is Hoisted And Large Spending Cuts Planned

Wow, this is BIG news:

The National Bank of Hungary (NBH) has on Wednesday raised its benchmark rate by 300 basis points to 11.50% i a bid to shield the forint from speculative attacks. According to a statement released by the central bank, Hungary's two-week deposit rate is 11.50% as of 11:00 CET 22 October.

Let me be absolutely calm, cool and clear at this point: THIS IS NOT THE WAY.

In addition Economy Minister Gordon Bajnai is also promising not to be shy when it comes to spending cuts.

The government has postponed tax cuts aimed at boosting growth from a 14-year low to focus on reducing reliance on external financing as investors shun riskier assets. It plans to narrow the budget gap to 3.4 percent of gross domestic product this year and 2.9 percent in 2009 from last year's 5 percent. The earlier goals were 3.8 percent for this year and 3.2 percent for next year.

According to Prime Minister Ferenc Gyurcsany Hungary's government, which submitted a revised 2009 budget draft to parliament last week, is ready to rework the details again if economic conditions warrant it:

``If we need to act, we will act immediately, like we have in the past 10 days,'' he said in an interview on state-run Magyar Radio late yesterday. ``If there's a consensus among analysts and evaluators that the pressure on Hungary is bigger then we previously expected, then we'll have to work through one or two nights again and redo the budget one more time.''

The government have pledged to reduce the budget deficit faster than previously planned to reduce Hungary's reliance on external financing. My feeling is that they are getting absolutely the wrong advice here. Alone, of course, they have no alterative, since the markets are obsessed with this point and will crucify them if they don't make at least a symbolic effort to reduce the fiiscal deficit, but this is why they need EU support on the fiscal side. Hungary is an EU member, isn't it????? Or do Europe's leaders in Brussels want to see one (and then two, and three, and four.......) "Argentinas" inside the Union's frontiers?

Also, the deeper the recession in 2009, the less tax revenue there will be, so we could get into a vicious circle here. And an 11.5% base rate at exactly the time the supply of foreign credit dries up means you can say bye bye to internal consumption for the foreseeable future. What the hell is the ECB up to at this point? Didn't we all use to say when we were young, "no return to the 1930s", yet this seems to be precisely the kind of policy mix Hungary is facing at this point.

Bajnai apparently said in an interview with CNBC television that the forint and stocks are under attack from ``speculators". This may or not be the case, but it is not the principal problem. The main problems are associated with the weak underlying fundamentals which have long characterised the Hungarian economy, and the fact that people have been drwan into taking out foreign exchange currency loans when the economic fundamentals (and excessive internal inflation) mean that the currency is almost bound to be weak, and trend steadily downwards until a strong, export oriented and competitive economy is built. This will need some years, and in the meantime Hungary needs to survive.

Hungary does not need another bout of significant spending cuts, on the contrary it needs a strong injection of FISCAL support from its EU partners, to try to underpin domestic demand while the Fx loan dependency unwinds. At the same time it needs substantial support from the IMF to allow the currency to move downwards in an orderly, and not a disruptive fashion. There are lots more things needed in the mid term like labour market, pensions and health system reform, but the patient is on life support, and needs to be kept alive, to live to fight another day.

Simply sending Hungary off into a long and deep deflationary recession is not the answer, and the sooner people come out of denial and try to address some of the longer term problems (including the demographic one) the better for all concerned.

At the moment I am knee deep in work from other areas - most of Eastern and Southern Europe it will be remembered is dropping into recession at this very point (not to mention Germany) - but I will try and find time for a longer and much more reflective post on Hungary at the weekend.

1 comment:

Mark Pittaway said...

I completely agree with you, but unfortunately I don't think that (a) the governments of the EU states are either awake to Hungary's needs, nor prepared to give the support required, or (b) that the economic and business establishment - let alone the government - understands that there is an alternative given the almost total hegemony of neo-classical economics and neo-liberal policy prescriptions.