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Hungary: Friendless and Alone

FT reports more bad news in a dismal season for Hungary:

Hungary cancelled a bond swap auction on Wednesday as the forint hit a record new low against the euro and fears grew about the country’s planned bid for International Monetary Fund/ European Union financial aid. […]

As Benoit Anne of Société Générale wrote in a note on Wednesday:

“We are very near boiling point in Hungary with a crisis that may escalate into something much more serious than a simple macroeconomic crisis (which mind you is already pretty bad). […] On the currency side, the HUF is now trading at record lows and given the huge financial stability risks that this raises, the central bank is now quite likely to go ahead with an emergency rate hike, November 2008-style. But the crisis has also become political. The EU is extremely concerned about the latest political developments and the potential EU response will – no doubt – be harmful to investor confidence.”

Hungary is in serious trouble, and it has done nothing to win itself any friends that might be inclined to offer a hand. In an excellent article in the current AI, Charles Gati details the naked power grabs and antidemocratic policies that have drawn the concern of the State Department and made President Orban’s government the pariah of the EU. Making matters worse, Orban has done everything in his power to antagonize and even demonize the IMF, the one body that could step in if its neighbors refuse to help.

With its crumbling welfare state, weak currency, dysfunctional politics and its new black sheep status, Hungary now has few good options.  A number of desperate plans have been proposed, none with much chance of success. Hungarians should prepare themselves for a cold winter.

Possible silver lining: Hungarians will realize this kind of fooling around doesn’t work, and demand more sensible policies from politicians in the future.  Democracy is sometimes a learning process, and the lessons aren’t always cheap.

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  • Bart Hall (Kansas, USA)

    A number of my in-laws are Hungarian and I speak the language fairly comfortably. Neither makes me any sort of expert, but I do love the country and its people.

    Hungary has several profound challenges, most notably demographics. The raw fertility rate is about one child per woman below replacement levels, and the population is decreasing by about 1/2% per year. In the last thirty years Hungary’s population has dropped from 11 million to under 10 million.

    You cannot maintain an old-age pension system, to say nothing of a welfare state, with those sorts of demographics.

    The struggle of emerging from communism has meant the persistence of a weak economy and children are expensive enough that the Hungarians have a saying “Kicsi vagy kocsi” — little ones, or a car [but we can’t afford both].

    The Hungarian economy and many families have been clobbered by the previously widespread tendency to obtain a home mortgage from Austria in Euros because the interest rates were quite a bit lower. Like many arbitrage carry trades it eventually blew up when the demand for Euros to make mortgage payments drove down the value of the Forint.

    To support the Forint the government raised interest rates which not only drove more mortgages to Austria but also hurt many business, who began to lay off workers.

    Many mortgages are now on the verge of default and the Austrian banks are sitting on more toxic Hungarian (and other central European) debt than the entire GDP of Austria.

    Hungary’s best hope at this point is a deep deflationary depression which may well be short. Otherwise it mightn’t be so deep, but will grind on for years.

    And birth-rates almost invariably decline sharply in a depression. Nagyon nehez.

  • gavin

    am i missing something. it seemed that a few yrs ago Hungary was doing alright. what changed between 1999 ’til now?

  • Gene

    I vacationed in Budapest in fall 2008 and was told by everyone that they would join the Euro in January 2009 and the Forint would disappear. Apparently that didn’t happen … what did I miss?

  • WigWag

    Relatively speaking, Poland, the Czech Republic and even Slovakia are doing much better. I wonder why the transition to capitalism in those nations proceeded so much more smoothly than in Hungary.

  • Bart Hall (Kansas, USA)

    The answer to #s 2,3, and 4 is about the same — it was *apparently* doing well because the underlying problems were papered over with unsustainable borrowing, especially when the former communists were in power under another party name. Klaus, Havel, and Walensa formed much better governments and did not attempt to mask the transitional dislocation.

    A few years ago Hungary, Hungarian business, and Hungarian consumers ran out of stuff to sell to foreigners — didn’t matter if it was government agencies privatised to the Austrians, the Tokaj wineries (to Japanese), crystal factories (to the Germans), or classic old bedspreads to anyone interested.

    They couldn’t meet the criteria for adopting the Euro, but at least Hungarians have a vastly better work ethic than the Greeks, or for that matter the Spaniards. Part of the reason for the Forint’s fall is that (unlike Euro-zone nations) Hungary retains the ability to inflate its way out of old debts, the cost for which is invariably devaluation.

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