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Contagion Turns East

Well, I don’t know how many other people have noticed, but the Hungarian forint tanked today. This is the one I had been waiting for, and expecting. And precisely why did it tank? It tanked because Viktor Orban, Hungary’s premier-in-waiting, said in public what everyone following Hungary has been saying for weeks now: Hungary’s fiscal deficit is going to be higher (possibly significantly higher) than the target agreed with the IMF. In addition Hungary’s incoming Prime Minister has publicly criticised the financial markets regulator (PSZÁF) and even gone so far as to give the impression he would like to replace central bank (National Bank of Hungary – NBH) governor Andras Simor (see Portfolio Hungary account here). In a world like the one we live in right now, what you ask for is what you get, and so they did.

The Hungarian forint dropped sharply on Tuesday – says the Financial Times – as comments from the country’s premier-in-waiting raised worries over its fiscal position. The forint and Hungarian stocks rose sharply on Monday as news that the Fidesz party had swept to a landslide victory in Hungary’s general election at the weekend reduced political uncertainty and buoyed local markets. Lars Christensen at Danske Bank said the remarks only confirmed his view that the positive reaction on the Hungarian markets to Fidesz’s win was overdone. “Fidesz’s victory will lead to a loosening of fiscal policy, which is rather more negative than positive for Hungary,” he said. By midday in New York, the forint was down 3.7 per cent at Ft203.65 against the dollar and lost 2.3 per cent to Ft269.17 against the euro.

As I say, this is what I had feared would happen. It has been obvious for some time now that the true extent of the fiscal position in Hungary was not being made public – especially off-balance sheet debt in public corporations, and in Public Private Participation projects. Of course, the incoming government, like its Greek counterpart before it, wants to “come clean” so as not to take what it would consider to be unmerited blame. But that isn’t how markets will see it, since they will simply push up the country risk element given that fiscal spending has been – in theory – being brought under control since as far back 2006. That is to say, and this is an issue we will have to face in a number of the countries in the East, the IMF programmes simply are not working as they should, or giving the anticipated and hoped for results. I have written about all of this on numerous occasions on my Hungary blog, most notably and most recently in my post of January 21 Hungary Isn’t Another Greece……..Now Is It? – which was treated sufficiently seriously to receive a direct reply from the then Minister of Finance, Peter Oszko.

In recent weeks I have refrained from replying to the Minister’s reply since I did not want to politicise my discourse in the context of the recent elections. But now they are over, and Hungary faces a complicated mess. The economy is stagnant, and unemployment is going steadily onwards and upwards. So there is no sign at present that the “cure” has made the patient better.

Hungary’s rate of unemployment ticked further up to a record high of 11.8% in the first quarter of 2010 from 11.4% in the previous three-month period, the Central Statistics Office (KSH) reported on Wednesday. The rate of employment has also continued to drop and reached a 12-year low.

But the worst part of this situation is that contagion is now moving Eastwards, meaning that EU institutions will now increasingly face a battle on two fronts – this won’t stop with Hungary, there is Latvia, Bulgaria and Romania to also think about (just to name the first three that come to mind). This is what I was getting at when I wrote my “There Is Another Shoe To Drop In The Global Economic and Financial Crisis – And The Focus Will Be On Europe’s Periphery” post back in September of last year. Time has elapsed, and inaction, denial and even incompetence at the highest level means that what was then only a possibility is now increasingly becoming a reality. And this on a day when Spain lost it’s first full “A” from Poor Standards – one down, two to go. As Felix Salmon so aptly puts it:

I covered emerging market sovereign bonds for many years, but I’ve never seen anything like this: a country trading at levels where the bear case is terrifying, the bull case is very hard to articulate, and everybody is talking about a possible default even when the country has an investment-grade credit rating from two agencies and is only one notch below investment grade at the third. Maybe the only thing which really explains what’s going on is that both yields and ratings are sticky. Which would imply that Greece has a long way to deteriorate from here.

This is no longer a rout, it is fast becoming a debacle. As Lennie Bruce once told Bob Dylan in a brief but eventful taxi ride, “in comedy everything is to do with timing”. Right now I haven’t the time to go that deeply into the details on Hungary, but my friend and collaborator Mark Pittaway – who sure as hell knows a lot about Hungary – just wrote a piece for me for a new website I am working on. So here it comes, being wheeled on stage just when the need arises.

The Comeback of a Political Survivor

The outright victory of Viktor Orbán’s FIDESZ party in the first round of Hungary’s parliamentary elections on 11 April, and the likelihood that they will win a two-thirds majority in parliament after the second round on 25 April marks a new stage in the unfolding of Hungary’s entangled political and economic crises – crises that have been in process since the summer of 2006. Most discussion of the election outside Hungary has focussed on the 16.67 percent won by the neo-fascist Jobbik party, with its explicit racist rhetoric towards Hungary’s Roma, its open anti-Semitism and its uniformed paramilitary wing, the Hungarian Guard. Within the country attention has focussed, especially among FIDESZ’s defeated left-liberal opponents, on the probability that FIDESZ will use its new found power and influence to purge the public sector and the media of its opponents, waging an intensified version of the “culture war” it conducted against the liberal left when it was last in power between 1998 and 2002.

Viktor Orbán himself ranks among Europe’s most persistent political survivors. In 2002 he was narrowly defeated by a coalition of Socialists and the liberal Alliance of Free Democrats in an election he was widely expected to win that took place in a benign economic climate. This defeat was largely self-inflicted and a product of FIDESZ’s authoritarian and confrontational policies towards its opponents.A further and larger defeat in 2006 seemed to confirm the outcome of 2002 – that Orbán’s divisive style and widespread suspicion of his authoritarianism and use of right-wing populism would keep FIDESZ out of power for a long period. In the light of this, Orbán’s political survival and return to power are worthy of explanation.

You can read the rest of this in-depth economic and political analysis of what is going on in Hungary before our very eyes over at the Global Economic Spectator site.

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About 

Edward is a macro economist based in Barcelona, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows. He is currently working on a book "Population, The Ultimate Non-renewable Resource?" Edward’s analysis can be found on his “Don’t Shoot the Messenger” blog on www.economonitor.com. He is also a regular contributor to a number of economics weblogs, including India Economy Blog, A Fistful of Euros, Global Economy Matters and Demography Matters. He was, in fact, a founding member of all these weblogs.