“If the IMF comes back, I am leaving,” Viktor Orbán, Hungary’s prime minister was quoted to say just a few days ago. Since he ascended to power, fierce opposition to international organizations was the hallmark policy of his government, devised both for maintaining popularity with his voters and for justifying the unpredictable, “non-orthodox” economic policy of his finance minister, György Matolcsy. There is no other way to characterize today’s announcement that Hungary is seeking a deal with the IMF therefore than as surprising, stunning – impossible to explain.
So far, what we are trying to explain is one short communication from the Ministry of National Economy. Orbán has yet to make a statement on the issue, the Hungarian National Bank was caught unaware of the government’s plans, and we have yet to see the response of the IMF to the overture.
The deed in itself – Hungary’s readiness to exchange its black sheep cloak for an opportunity to return to the international fold – would normally be a sign that the Hungarian government’s war of independence ended in complete failure. In the communication announcing that the Hungarian government “has launched negotiations for a new type of co-operation with the IMF,” however, the Ministry of National Economy does not even come close to admitting defeat. If anything, their description of their intent is downright triumphant:
The Hungarian economy has been based on new fundamentals in the past one and a half years. To this end, we had to cancel each old-type forms of cooperation which were obstacles to our economic independence. This we have managed to carry out and achieved that the Hungarian economy receives market financing and it does not depend on the goodwill of others. Thus, the age of renewal has ended and the age of growth has begun; for this we need to utilize every instrument at our disposal.
In the past one and a half years we have renewed Hungary’s economy. During the period of renewal we focused on gaining economic freedom and rearranging Hungary according to national interests. To this end, we had to keep a distance from every kind of influence, thus we had to cancel such old-type forms of cooperation which had been obstacles to our economic independence. As a consequence, we managed to achieve economic independence and market financing, by which we have increased the number of opportunities at our disposal.
Consequently, in the past one and a half years we have managed to fully enforce national interests without having to adapt to others’. Thus, we can build our new relationships on new fundamentals enforcing our national interests.
In order to spur growth we first and foremost have to protect our independence. It means that Hungary should be financed by markets, but it is hindered by the protracted crisis of the Euro-zone.
Therefore, a new type of cooperation with the IMF, adapted to our economy which has been transformed on the basis of our national interests, could be a potent instrument which would increase our financial and economic independence instead of hindering it like the old one. This new type of cooperation, unlike the old one, would not increase government debt as we do not take out a credit, but we will make an insurance contract in order to increase the safety of investors in Hungary.
Translated into IMF terminology, it sounds like Hungary is seeking a Flexible Line of Credit. This is the kind of no strings attached arrangement that fits the description, though it is also an arrangement that would require strong economic indicators from the requesting country. “Only very strong performers qualify,” states the IMF’s data sheet, indeed no country has ever drawn on FLC resources.
A Flexible Line of Credit arrangement would indeed differ considerably from Hungary’s experience with the IMF in 2008, when it needed a Stand-By Arrangement. According to analysts, Hungary might qualify for a more favorable arrangement than the SBA, such as the Precautionary Credit Line or its “insurance” version, as the Hungarian government calls it, a Precautionary Stand-by Arrangement – though neither of these would come without strings attached. “Sound performers qualify” for this line of credit, and the borrowing country must agree to “commit to a focused set of policies aimed at reducing the remaining vulnerabilities identified in the qualification process.”
The announcement of the Hungarian government is even stranger because during the week preceding its release, if anything, we have seen an amplification of the government’s anti-IMF rhetoric. The day before the announcement, there was no indication of the turn: on Nov. 16, András Giró-Szász, spokesperson for the Hungarian government told reporters at a press conference that Hungary does not intend to seek an IMF deal. Talking about the IMF, on Monday Matolcsy had the following to say in the Hungarian parliament: “this three-letter institution opposes every single one of our measures, and for this reason, governmental policy is not tuned to it, but precisely against it.” A week ago in London, Viktor Orbán himself told his audience at the London School of Economics that breaking with the IMF was “a very risky but correct decision.”
Given just how unexpected the announcement turned out to be, index.hu speculates that it was released in a panic, most likely over news about the country’s downgrading to investment junk status by one of the credit rating agencies. Generally the government in question is given notification two days in advance of the downgrade. If the speculation has any truth to it, news of the downgrade should reach the public on Friday afternoon, or by Saturday.
Origo.hu relies on sources within the government to also predict an imminent downgrade by Standard and Poor’s. Having been notified about it as index.hu described, the government wanted to moderate the impact of investor panic by announcing its return to the negotiating table with the IMF. “This is why it was important to announce their intention to negotiate [with the IMF] as soon as the decision about it had been made.” Or, as the source put it, “the fear of junk overrode everything, even sending a notification to the IMF about their intentions.”
Experts sought out by Bloomberg suspect that the Hungarian government’s real intention is to emulate Turkey, which “had been discussing a possible stand-by loan accord for more than a year and a half when the government in Ankara announced in March 2010 that it no longer needed a backstop.”
Many Hungarian commentators point out that the government is bound to lose its political credibility domestically upon backtracking on its anti-IMF policies. The reporting by Reuters is excellent at detailing why, as one of their sources puts it, this counts as the Orbán government’s biggest domestic political defeat to date.” BudaPost has a great summary of the domestic implications of asking for IMF assistance from the day before the announcement. Independent newspapers and opposition sources have only reiterated these positions since Thursday.
For some reason, however, the Hungarian government (if it indeed will stand behind the overture to the IMF which, after all, came from Matolcsy’s ministry) does not seem to worry about losing face. The matter was presented in tones even more triumphant to supporters of the government than what is contained in the announcement itself. Magyar Hírlap, the news source for the government’s supporters reports about the turn of events in the following words:
In the announcement, they emphasize that, for the growth of the Hungarian economy, first and foremost “we have to protect our independence. It means that Hungary should be financed by markets. This is hindered by the protracted crisis of the Euro-zone.”
For this it would be a good instrument to have a new cooperation with the IMF, adopted to our economy,” already “arranged to our own interests,” which, contrary to the old one does not limit, but augments the country’s financial-economic independence. “This new type of cooperation, unlike the old one, would not increase government debt as we do not take out a credit, but we will make an insurance contract in order to increase the safety of investors in Hungary” – states the announcement.
The rest of the article, titled “New Type of Cooperation With the IMF” is about the newly soaring stock market in Hungary, the strengthening of the forint, and that London analysts now think that Hungary can avoid a downgrade. It also reports each of the opposition party’s response to the development – the reporting is lengthy, but only the above two paragraphs address specifically the government’s change of policy.
For readers trustful of the Hungarian government, who are still numerous, today’s news therefore amounts to the following: The Hungarian government is not back-tracking from their current course, in fact, Hungary is marching on toward victory. It is hard to predict whether voters of Fidesz will even realize the contradiction in the government’s policy. Perhaps they are still followers of that specifically Central-European school of logic which advocates the superceding of untenable contradictions by a glorious moment of Aufhebung (especially if an IMF agreement were to stabilize the economy).
The next chapter of this story is going to require an actual response from the IMF. One of the sources Bloomberg sought out about what this reaction might be, Jeremy Brewin of Aviva Investors in London, thinks that if Hungary can be party to a real agreement (“not a ‘new’ arrangement, but engage with the IMF in the correct style the IMF expects”) the IMF would think this sensible.
However, members of the IMF delegation in Hungary, who are in the country for an economic review and have no mandate to negotiate a new line of credit, were caught just as surprised by the announcement as everybody else. As the Financial Times put it, quoting one of their sources in their post about Hungary’s “embarrassing U-turn,” this affair might be nothing more than “a form of verbal intervention in the market without any substance behind it.”