Hungary-IMF Talks: Central Bank Law, Check?

Last week’s most puzzling political development had to be the inexplicable news that Minister of National Economy György Matolcsy submitted a newly-amended central bank law for vote before the parliament. What exactly was inexplicable about it? The newly amended version was as good as the old one. Actually, it was the exact same thing as the old one: Hungary has already revealed these amendments in the form of a draft law submitted for consultation to the European Central Bank on March 7.

Draft submitted without changes. According to information obtained by the Hungarian economics weekly HVG (link in Hungarian), Matolcsy chose to change not one iota in the bill even after having received a detailed memo of changes considered to be necessary by its negotiating partners. The Hungarian government has for weeks been pursuing a befuddling strategy, the essence of which was to act like inattentive students who forgot to take notes during class: as if the expectations of the EU (and/or the IMF) were somehow incomprehensible or too difficult to memorize. An assortment of government official have thus been telling foreign journalists and the Hungarian public that they do not know what preconditions they had to meet for the IMF talks. In the case of the central bank law, however, not only were there written memos and critical analyses (this one is report of the concerns of the European Central Bank), but several five-party talks were held to clarify the international position on the draft bill. With the submission of the original draft to parliament, the Ministry of National Economy ignored the lists produced through both forms of communication.

Hungary does not want an IMF deal. The surprise is not that the Hungarian government seems to be implying that it does not want to hammer out a deal with the IMF. One already knew that they have no intention to sign an IMF deal. This could be established inductively, by considering one communication of the Hungarian government after another in the context of the whole story, though the shorter version of the argument should suffice equally well. It runs something like this:

Let’s suppose that the Orbán government had two-third majority in parliament, thereby being free to push its political will through the legislature exactly as it pleased. Let’s also assume that they needed the money like a junkie needs its fix. Furthermore, if neither the means nor the need is missing, then let’s also assume that the will is in place as well, i.e. that the Hungarian government does in fact want to sign a deal with the IMF. With all three necessary conditions in place, they would have already found a way to secure an agreement. Then, five months after the announcing their request for IMF help, they would not be feigning naiveté and begging for written notices on the preconditions of beginning formal discussions on the loan package - as some of the highest ranking members of the cabinet, including the minister of foreign affairs and the  prime minister himself have done in the last few weeks.

One could even go as far as saying that the Hungarian government never really wanted an IMF deal to begin with. There has always been very little pointing to the notion that they either recognized or were willing to do what an IMF deal would have meant for the markets: to adopt more predictable policies and agree to remaining accountable about pursuing these. The Hungarian government has always only asked for an “insurance,” a “safety net,” or a “backstop”: some kind of certificate of trustworthiness for the markets (which from the beginning they have expressed by their fixation on the term “precautionary credit line”).

Still, even if it was already clear that Hungary will not sign an IMF deal because its government does not really want one, could there be a more blatant sign of what their intentions are than sticking with the exact same version of a crucial bill that has been subject to “negotiation” since March 7? If all along their intention was to restore confidence in their handling of the Hungarian economy, could anything speak louder on this issue than the fact that they insist on retaining a law which raises fears of a political takeover of the country’s central bank?

Humiliating treatment. But this was not even the full extent of the humiliating treatment accorded by the Hungarian Ministry of National Economy to its negotiating partners. The central bank law was always thought to be the most likely to be resolved among the three outstanding issues that were known to require settling prior to Hungary’s meeting with the IMF negotiating team. It was the one item under discussion where the Hungarian side was expected to show most flexibility. All the more so since statements made by Viktor Orbán contended that the Hungarian prime minister deems political conditions of an IMF deal “unacceptable” and that he thinks of such demands as “nothing but blackmail.”

Orbán was thought to be referring to two other points of disagreement: to the reform of the country’s data protection agency (a crucial office for protecting the rights and privacy of individual citizens from intrusions by the state), and to a set of laws that severely limit the independent functioning of the Hungarian judiciary. The EU is currently reviewing Hungary’s proposed changes on these matters, but whether these are substantial enough is doubtful. Each of these proceedings concern a number of actual amendments to be made to legislation passed in Hungary last year; and even the Hungarian government admits that, on lowering the retirement age of Hungarian judges (which would essentially clear the bench for government appointees) and on the termination of the ombudsman of data protection, the position of the EU and Hungary “could not be further apart.”

Progress on the central bank law appeared more likely, however – the central bank bill concerned fiscal policy, after all. There was no way Orbán could have found the means to force the EU and the IMF to drop their “political” demands, it was widely believed, without at the very least making good on his promises to dismiss concerns that he is setting up a political takeover of the central bank’s monetary policy-making functions.

Five-party talks. There was all the more reason to expect progress in talks concerning the central bank law given that just days prior to the ministry’s submission of the final bill, several meetings of delegates from every single body with pertinent opinion on the matter – the IMF, the EU, the European Central Bank, the Hungarian government and the Hungarian Central Bank – took place. Ostensibly, the goal was to lay to rest concerns raised about the draft bill by the European Central Bank (the opinion of which also determines the demands set for Hungary by the EU).

One such meeting took place in Frankfurt just a day before György Matolcsy and his ministry took the draft bill that supposedly constituted the matter over which the meeting was called before parliament without an iota of change. There may have been signs this was imminent: instead of someone with an actual mandate to negotiate, the Ministry of National Economy sent a low-level ministry official to attend the meeting. The so-called “talks” therefore only amounted to note-taking by the delegated ministry department head and produced nothing more than another list to be delivered to the actual decision-makers of the ministry (a written memo stating these concerns had already been sent by the European Commission and the European Central Bank).

Central bank law. It is true that some of the disputes that remain unresolved between the Hungarian government and the European Union concerning the central bank of Hungary are primarily of symbolic nature. The salary of the current head of the central bank, for example, or whether he should take an oath to the Hungarian constitution or, to the contrary, be exempt from doing so appear to be mere storms in a tea-cup – though the latter would signal that the Hungarian National Bank is recognized an independent policy-making body, an important requirement from the perspective of the European Central Bank. It is also well-known that Orbán could have chosen a much more subtle way to take over the national bank if he would only been able to wait until March 2013, when the appointment of András Simor, the current central bank president, expires and Orbán will be able to appoint anyone he fancies in his place.

But the disputes also include provisions allowing for much more blatant abuses of governmental power to interfere in the operations of the central bank. Both the March 7 draft and the newly-amended bill leave in place a provision that creates a new vice presidential position in the Hungarian National Bank, a position which would allow for an Orbán appointee to take over some of the most crucial powers currently executed by Simor. Neither does the draft bill change plans to expand the membership of the monetary council. With nine instead of seven members (the two new members would be chosen by the prime minister), government appointees could easily take over control over the council.

The December version of the law. The reason why the central bank law did not originally pose a problem for the IMF talks was that the legislation was not in existence until December – until only about a month after Hungary contacted IMF with its request for a credit line. Even then, the bill received the rubber-stamp approval of Orbán’s two-third parliamentary majority amidst notable objections (this, for example, is an ECB press release dated Dec. 22, eight days prior to passage of the bill). Warnings not to pass the bill included a harshly phrased letter of objection received in the Hungarian prime minister’s office from by European Commission President Manuel Barroso. The bill passed in defiance of all of these protests.

According to the Hungarian government’s latest communication, the amended bill is a product of a compromise, since it contains changes to 4 out of 6 of the issues criticized by the EU (one does notice that they think that two-thirds is their lucky number). Again, this position is perplexing. Why then would Matolcsy’s ministry participate in five-party negotiations, why would cabinet members Orbán, Martonyi and Szijjártó all play a game of pretend asking their partners for written notices if the March 7 draft already meets their criterion of a compromise? Though logic would dictate that this is their position, problems also arise with the numbers. First and foremost, there are more than two issues which remain unresolved in the government’s bill (you could have counted four mentioned just above). Secondly, there is the problem of additional, unrequested changes made to the December bill by the Hungarian government.

For example, the Hungarian government chose to remove from the original law provisions of how members of the monetary council may be replaced. The Hungarian government was explicitly asked to keep these passages, since without detailing these procedures, the precise method of replacing members already appointed to the council could be created anew, without limitations posed by the law. This “extra credit work” of the Hungarian government now opens a new avenue for the government to seize control of the monetary council, an additional problem to be discussed in a new round of talks if such talks ever are to take place in good faith.

In the past, the closest Tamás Fellegi, the Hungarian state secretary for Hungarian relations with the IMF ever got to the IMF negotiating team was that on January 13, 2012, he was received for a meeting by IMF managing director Christine Legarde. At that time, Legarde’s statement said that: “before the Fund can determine when and whether to start negotiations for a Stand-By Arrangement, it will need to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability. Support of the European authorities and institutions would also be critical for successful discussions of a new program.”

The Cost of the Delay. Calculations by the Hungarian news portal portfolio.hu estimate that prolonging a deal with the IMF has cost approximately 96 billion Hungarian forint, or 430 million USD per month to the Hungarian taxpayers (the English language version of their paper is available here).

EU to agree to IMF talks next week? With the unusual tactics employed by Hungarian government, the European Commission also finds itself in a position where creativity will be crucial to the handling of the “Hungarian problem.” Viktor Orbán will fly to Brussels for another meeting with Jose Manuel Barroso on April 23. It is unclear how seriously he is going to be taken, especially since he had already held one-on-one talks with Barroso in January and that during that same visit, he had already reassured the European Parliament that he would move quickly to address the concerns of the European Union about the controversial laws adopted by his party in the country’s parliament. This was already three months ago (no other leader of a country has been seen with such frequently by the President of the European Commission as Orbán, by the way).

Though it is impossible to predict what will happen next week, it looks like both the European Commission and the Hungarian government are preparing for an announcement of an official start date of the IMF talks, reported HVG on Sunday citing sources in Brussels (link in Hungarian). Though the EC will proceed with the infringement proceedings already under way (an announcement of the Commission’s response to Hungary’s proposed amendments may take place on Wednesday), and may initiate proceedings on further Hungarian legislation, they will nevertheless give green light to the IMF talks.

In an unprecedented arrangement, however, the European Commission would tie the schedule set for drawing on the IMF funds obtained during the talks to a pre-determined schedule of compliance with EU demands. Apparently, they think that the Hungarian government’s most important bluff is its insistence that a “precautionary” credit line would suffice to restore the country’s standing in the international markets. If the Hungarian government were wrong and if it failed to manage its debt without IMF help, under this arrangement they would have no recourse but to give in to the European demands.

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4 Responses to Hungary-IMF Talks: Central Bank Law, Check?

  1. Dubious says:

    I don’t necessarily think Fidesz are an evil force, trampling on democracy. I just think they are incompetent buffoons who have no idea on how to run an economy, and are too proud to admit it. They blunder from one crisis to the next, trying to put out the next fire, most of which they themselves lit. They are like the bumbling cartoon henchmen stealing the big sacks covered with $ signs in ridiculous and obvious schemes. The only difference is in the cartoons someone would stop them by the end of the episode. We’re all waiting… anytime time guys.

  2. Eva says:

    From the article:

    “The Hungarian government was explicitly asked to keep these passages, since without detailing these procedures, the precise method of replacing members already appointed to the council could be created anew, without limitations posed by the law. This “extra credit work” of the Hungarian government now opens a new avenue for the government to seize control of the monetary council, an additional problem to be discussed in a new round of talks if such talks ever are to take place in good faith.”

    This is an impressive move by such a tiny nation as Hungary and hopefully it will set an example so other members of the European Union will follow. First of all, what is wrong with the Hungarian side asking for written confirmation of IMF requests / conditions of bale-out ? Only those who attempt to pass a shoddy deal try to avoid giving written confirmation of their requests in a deal. Second, since now we have evidence based on past experience that IMF conditions imposed on countries receiving IMF help sometimes ‘accidently’ undermined national security in said countries – as the IMF had to admit a number of times already that it made regrettable mistakes in Africa and South America – what is wrong with the Hungarian governments position of attempting to maintain potent national self-determination? If what Europe wants is proper unification of different Nations then what Europe needs is independent, self-determined European Nations to unify and not a flock of sheep held at gunpoint trashing each other just to keep alive.

    By the way, the requirement of having the central bank of a nation independent from influence of the national government has not always worked out so well for the IMF. Not quite sure why the IMF insisting on this move, is that so hard to learn from the past?

    • Eva: I think you’re missing the point. This post characterizes the negotiating style of the Hungarian government. It’s not so much about right or wrong, but about the fact that the Hungarian government is engaged in bad faith negotiation (the above were examples of not negotiating in good faith). But the conclusions one draws from having to deal with a bad faith negotiating partner is not that their “position” is right or wrong, but that they are not to be trusted.

      As far as the “position” of the Hungarian government is concerned, there is hardly anything coherent about the many things they’ve said or done thus far. This is not about some kind of a principled way of fighting for the Hungarian people. When they feel like they might need an IMF loan soon, they are willing to agree to anything. When it becomes urgent, Mr. Fellegi (or Varga) will be instructed to do a public performance licking the boots of Mr. Barroso and Ms. Legarde if that’s what it takes to get it (regardless of whether or not there is a written notice of the request). But right now, the government has some leeway: another year, at the very least. One could fall for appearances and think that they are probably playing a long-term game, except when you look at how unprofessional they are in the way in which they have conducted themselves thus far, the one thing that is obvious is that there is no plan here. They are just going with the flow. When they are in a bind, like they were in January, they will promise anything to get out of it. When things go well for them, like right now, they are wasting their time with posturing as if they had “stood up to power.”

      Let me explain the paragraph you quote. It’s about a specific negotiating situation that obtained from early March through mid-April between the EU and Hungary. On the table, at the time, were a number of changes the EU was asking Hungary to change. The Hungarians wanted to get away with making two-third of the changes. They could have stopped at that. Instead, they went ahead and changed aspects of the law for the worse – thereby increasing, rather than decreasing the risk that their negotiating partner would want them to return for another round of negotiations, rather then agreeing to a compromise. In effect, with the additional changes, they went ahead and put down further items on the table – they opened up what would be new areas of negotiation (the EU did not want to continue with these talks, but this did not put an end to the dispute. The very same issues are now subject to bargaining between Hungary and the IMF).

      “What is wrong with the Hungarian side asking for written confirmation of IMF requests / conditions of bale-out”? Absolutely nothing. If you ask for it once. Maybe twice. Or a third time, but that already suggests that you are not on top of things. But how many times was the Hungarian government served with a notice about just one part of this story, the two items related to the central bank (appointing a third vice president to the central bank to take over many of the functions of the current president and expanding the monetary council by adding two additional government-appointed members which would ensure that Orban appointees would dominate the council)?

      These changes to the central bank law were passed _after_ Hungary has asked the IMF for a bail-out. Communications of all kinds were sent to them _prior_ to passing this law that this will be regarded as an obstacle to starting negotiations with the IMF. Several of them were provided since. And the very idea that the Hungarian government needs to be told that these moves are no acceptable, because they undermine the very principles upon which a free market economy is based, is ludicrous. (By the way: the Hungarian government has already said that they are willing to withdraw this measure as well – so it is not their position that somehow this would be a means of national self-determination or anything of the sort).

      I think that for the Hungarian government to act in such bad faith is embarrassing. If you think that a small tiny nation should be proud of making a name through these tactics, it’s an opinion you’re entitled to have. What I’m trying to say is that they are leading everyone on – especially those who think that they have the interest of the Hungarian people at heart. If they were really as keen on representing the interest of the country as they say, they could pursue a responsible and predictable economic policy. Let’s just begin there. For example, anybody in their right mind would have corrected their failed experiment with the flat tax rate – which is so dear to them because it benefits the richest strata of society while it makes the situation of the poor even worse than before. Or what about their newest package of five new taxes?

      Which is what makes this such a desperate situation. Yes, signing a deal with the IMF usually has its consequences, but when compared to the Hungarian government’s own measures, I am not sure there is anything to fear.

  3. Eva says:

    Thanks for the thorough response, Contrarian. Having said that, you are probably correct about me not quite getting the point of the article. Even after I gave my self some time to digest what you explained, I still can’t see how the Hungarian government is engaging in ‘bad faith’ negotiations . The IMF has an established reputation of ‘making mistakes’ when setting conditions on the loans they provide to struggling nation and still expect some boot-kissing from the needy, regardless. What kind of faith is reasonable to have in an organisation like that?

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