Hungary's persecution complex

By bne IntelliNews November 15, 2011

bne -

The growing pressure on Hungary from the markets is being driven by investors seeking "revenge" for the government's "unorthodox" fiscal policies, and does not reflect a true picture of the economy, according to the chairman of the Hungarian Chamber of Commerce and Industry.

Laszlo Parragh's complaints are seen a worrying sign that Hungary is not prepared to face reality, coming after the country is struggling to raise debt, saw the forint drop to new two-year lows the previous week, and was put on review for a downgrade to junk status by two of three main ratings agencies. His words also suggest that more measures form the government that could hurt investors and banks might yet emerge.

Parragh complained to Magyar Hirlap in an interview published on November 14 that the country's economic and financial position is in much better shape than the financial markets give it credit for, and said that some simply want to punish the country. He said Hungary had made "far greater strides than the world recognized," the MTI newswire reported Parragh as telling the daily.

Whilst Hungary's economy has indeed made a reasonable recovery, the rating agencies Standard & Poor's and Fitch Ratings are not alone in having warned the country over the past couple of months that its policies - which include breaking with the International Monetrary Fund programme it secured in 2008, special taxes on several sectors, and making the banks shoulder huge losses on the foreign exchange debt of mortgage borrowers - are likely to damage growth, confidence and relations with international investors.

Although Hungary enjoyed a good start to the year, with strong export demand from the Eurozone bringing about a return to growth after a painful recession, recent news has been much bleaker. As early expectations of continued strong demand from Germany were dashed, growth forecasts have been revised sharply down: in the spring, the European Commission forecast growth well above 2% for 2011 and 2012; in its latest outlook, it expects growth of just 1.5% this year and only 0.5% in 2012.

Of course, it never does any harm for populist governments to cultivate a little paranoia and Parragh promptly obliged by suggesting foreign investors and a section of international finance are "hungry for revenge" and want to punish Hungary. "Those who have been the losers of the past year-and-a-half of the government's decisions - certain banks, financial investors, retail chains, energy multinationals - now see us as being in trouble," he said.

Those "victims" of the government, alongside many analysts, have warned that the governement's measures are likely to hold back investment, and in particular, the worry is that the early forex mortgage repayment scheme will stymie lending growth from banks whose Western European parents are already facing huge capital needs at home. Asked about the potential effect on the economy of slowing lending, Parragh said the money markets were not working well elsewhere either. "The government must intervene here ..." he said, without elaborating.

It was only a week ago that the government pulled back from threats to implement further measures intended to reduce houselhold's forex-denominated debt - which it says represents the biggest challenge to the country's macro-economic situation - and agreed instead to listen to the banks before announcing any moves. The worry is that should the authorities adopt too stringent a siege mentality, then they could well go on the warpath once more.

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