Hungary govt's schizophrenic moves

By bne IntelliNews May 15, 2012

Kester Eddy in Budapest -

At a conference in Budapest on banking in the region in April, the panel on Hungary offered some divergent opinions on the good and bad in the sector - but on one issue they were fully united. As Istvan Racz, former chief economist with the Hungarian financial regulator, noted: "The economy is pretty much on the verge of recession... with all major indicators pointing in the same direction... [so] I think it would be tremendously important to grab an EU-IMF [precautionary loan] deal as quickly as possible."

The credibility gained from an agreement between Hungary and the EU and International Monetary Fund would greatly ease market concerns and thereby reduce financing costs, both for the country and commerce in general, Racz underlined, with accompanying nods from other panel members.

Little wonder then, that the markets warmed to the news on May 11 that Mihaly Varga, a former finance minister in the first Fidesz government from 2001-2002, was to take the helm on Hungary's negotiating team with the two institutions, interpreting the change as indicative that Hungary is intent on reaching an agreement.

Viktor Orban, the Hungarian prime minister, announced the move in his weekly radio broadcast, saying Hungary needed a specialist to continue the procedure while praising Varga's predecessor, Tamas Fellegi. "The country owes him a great debt," he intoned.

Varga's appointment makes perfect sense, David Nemeth, chief economist with ING Bank Hungary, tells bne. "When you start negotiations with the IMF, you have to create a very detailed programme, for example [specifying] what kind of laws will be created, their effect on the budget, their timetable. From this perspective, having a more financially [savvy] guy is more important than in the pre-negotiations, which focus more on political issues," he says.

But even as Orban's Hungary appears to make one step forward, not for the first time it takes two steps back. For no sooner had it reiterated its pledge to end the "crisis" taxes on the energy, telecommunications and banking-financial sectors, than it imposed replacements, leaving many top managers in the affected sectors dismayed at yet another example of the government ploughing its own furrow with scant concern for the implication of its decisions on the real economy.

Called to account

As an example, the government had ignored a politely-worded warning from the telecom sector in which the three leading mobile firms in Hungary had jointly stressed that the threatened new tax involving a HUF2-per-minute levy (less than 1 cent) on calls and on individual text messages would ultimately impinge on customers and cause a reduction in VAT revenues.

On May 14, while telecom bosses wrestled with the technical and financial implications of setting up systems to measure and collect the new tax by July 1, the three companies again expressed willingness to negotiate a new tax system, warning that the tax as it now stands will "jeopardise Hungary's competitiveness" and its business sector. "The minute-based tax included in the current draft would not mean a predictable revenue source for the state budget and it would considerably change the telephone usage habits," the companies claimed.

Bankers were giving similar, if not more desperate, messages, saying that the latest tax of 0.1% to be levied on all transactions - targeting HUF130bn (€443m) in revenues - could have devastating consequences on the sector.

Mihaly Patai, president of the Hungarian Banking Association, told Hungarian television that the new taxes were in total contravention of an agreement patiently negotiated with the government last December regarding future cooperation. "Banks are not ready to pay a further HUF130bn in taxes after two disastrous years. The new measures could cripple the financial sector," as they contain "idiotic elements" that could greatly harm financial liquidity in Hungary as the tax would impede normal cash management operations.

While the government has said it would be open to suggestions from the companies involved, the latest round of tax laws, and how they were announced, further undermines business confidence the regime, argues ING's Nemeth. "I think the IMF will be asking how this tax affects the banking sector and the economy in general. They will want detailed studies," he says.

Varga, it seems, will have to hit the ground running.

But for some observers, whether Fellegi or Varga heads the negotiating team rather misses the point. "Varga is a perfectly nice man with appropriate, if not outstanding, credentials as an economic policymaker. His promotion, if being given this assignments can be called that, is merited and welcome," Peter Rona, economist and lecturer at Oxford University, tells bne. "But this is not the issue. The issue is that the man in charge of Hungarian economic policy, [Gyorgy] Matolcsy, has no credibility... with international institutions."

According to Rona, Varga's appointment only exacerbates the existing absurd situation, whereby the international institutions (ie. EU and IMF) "will not negotiate with the man who is capable of making commitments on the course of economic policy," ie. Matolcsy, while "the man whose words could be taken seriously, that is to say Varga, has no influence over Hungarian economic policy."

As Rona concludes: "One wonders why the IMF or the EU would negotiate under such circumstances."

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