After Downgrade by Moody’s, Hungarian Government Gets Reality Check from Panel of Economic Advisors

Yet again, the timing was very awkward. Earlier on the same day, György Matolcsy, Hungary’s Minister of National Economy, was delivering on his patriotic duty to tell tall tales. In fact, on that particular day, Matolcsy went as far as likening “[o]ur quick success” – here, he was referring to the performance of the Hungarian economy over the last 18 months – to rebuilding the country in just 18 month in 1945-47.

Unfortunately, it was on the same day, shortly before midnight, that the credit rating agency Moody’s downgraded Hungary’s investment grade to junk category. As such, it is impossible to properly assess the number of humorous journalistic reactions to Matolcsy’s over-the-top piece.

The quick turn of events immediately produced much better material for stand-up comedy. This time around, newspapers all over the world broadcast the economic minister’s assessment that “the decision by Moody’s has no basis in reality.” They are part of a financial attack against Hungary, and punishment for the government’s unfavorable treatment of banking institutions.

Said financial attacks have been on the radar of the government for some time by then. The day before Moody’s announcement, the Hungarian government instructed the country’s national security services to conduct an investigation into attacks on the forint. A room-full of cabinet members gathered together for their regular Wednesday meeting could not find a better explanation for the large swings in the Hungarian currency’s exchange rate apparently.

The Hungarian forint did hit a historic low just days before the government announced its intention to request IMF, and since then it did see a rebound – a dynamic that utterly which defies human logic. The very politicians who were supposed to be in charge of the country’s economy certainly had nothing whatsoever to do with these curious movements in the exchange rate: as government spokesman András-Giró Szász stated at a news conference, Hungary’s economic performance did not justify the currency’s recent weakness.

Gabriella Selmeczi, spokesperson of the governing party Fidesz echoed the same sentiments at a press conference, inserting the word “objective” in front of “reality” in Matolcsy’s “has no basis in reality” – for greater emphasis, and just in case the people could not believe their ears. “Hungary’s economic indicators are better than those of her neighboring countries,” Selmeczi went on to say. Though “on the financial markets, they are quite critical of these measures,” “we would like to do what is good for the Hungarian people, not what is good for the banks, and the bankers.”

More and more Hungarians would find themselves at a complete loss to name just one good thing that the Orbán government did for the Hungarian people, but that’s hardly the point here. With the government’s reactions already broadcast in the international press, and the Hungarian currency nose-diving, again, there was opportunity to witness another jolly stage-play on Friday afternoon as the government proceeded to seek advice of eleven of their loyal economic advisors.

The participants of the meeting during the photo-op. Present from the government's side: György Matolcsy, Viktor Orbán, Péter Szijjártó (on the right) and Mihály Varga (not pictured). Photo by Simon Móricz of Népszabadság.

Two of these economists, talking independently to journalists on the condition of anonymity walked away from the meeting with the conviction that “[t]he head of government and the minister of national economy really believe that malignant speculators attacked Hungary. But we told them that this is a mistaken view, they are looking at this through the wrong glasses.” The financial world does not work like that.

According to‘s reporting on the meeting, “[t]he prime minister was very interested, he wanted to understand different things, such as how credit rating agencies work, through what channels and in what scope of time the central bank’s rate policies exert impact, he asked about speculations and banking matters.” The atmosphere was much more promising during this meeting than before, in a meeting that took place in early September. Back then, Orbán and Matolcsy took notes but did not engage in feedback about the advice received, whereas this time, they “wanted to understand the situation, and why the markets punish us so much.”

“It was only slightly evident about Orbán and Matolcsy that they were scared about the situation, but they were not panicking at all,” added one of the economists. “It was apparent that they were clear about the seriousness of the moment.” and also based its reporting on information obtained from two of the economists present. Their sources agreed that, on three important points, the economic advisors expressed to the government a unanimously and emphatically recommended course of action.

First, Hungary has no other way of weathering through the current crisis than by coming to an agreement with the IMF according to its consultants. In practice, this means that the Hungarian government must agree to a stand-by agreement [this is the agreement which has many “strings attached” – the Hungarian government’s communications stated willingness to engage only in arrangements that would not threaten Hungary’s current “independent” economic policies]. Regarding the amount in particular, the government’s figure of requesting a credit line of 4-5 billion euros was a figure too low according to the meeting’s participants.

Second, Hungary’s budget must be rewritten with numbers reflecting 0% growth in the economy. This was demonstrated with the use of statistical data to the prime minister; according to the unnamed sources, Orbán was open to this modification and indicated that the budget would be reworked accordingly. This portion of the discussion included recommendations that the new budget would have to be balanced by cuts rather than raising taxes, which again also seemed to register with Orbán.

Thirdly, all of the economists recommended an end to the government’s current economic policies, as well as the proper reappraisal of past measures. As far as the latter is concerned, the government’s advisors thought that the “original sin” of the government was the forex loan repayment program from September, but they also pointed out that, by blaming speculators for the low forint rate, “the government can only lead itself astray.”

Matolcsy was silent during the consultation, he made grimaces every once in a while but did not utter a word. Earlier, at the beginning of the meeting, he made a presentation about the state of the Hungarian economy – in the same vein as he tends to present his resounding successes to the public – but the participants of the meeting did not think this presentation worthy of discussion. In their words, “it lacked honesty and clear vision.”

One of the potential reasons for these leaked accounts may have been the outrage some of these economic experts felt at Matolcsy’s public statements regarding the consultation immediately after the meeting.

After three hours spent behind closed doors, by Friday afternoon, the forint rebounded from its earlier free-fall, likely due to expectations regarding the outcome of the government’s meeting with an entire panel of economic advisors.

When Matolcsy took to the podium of the news conference, however, he could only offer the same phrases already heard in the morning: Hungary is the victim of attacks by speculators, there are military operations under way against Hungary on the financial markets, the Hungarian government has already proven that its country is the best in terms of balancing the budget. His budget, in the words of the government’s consultant, is “bullet-proof,” next year’s growth is expected to be in the range of 0.5-1%.

Matolcsy also misrepresented the economists’ advice regarding an agreement with the IMF: while he said to reporters that they advised co-operation with the IMF – “as this is necessary” – he said that he hopes to obtain a precautionary line of credit through the negotiations [which is a much more “lenient” credit option than the stand-by agreement discussed during the meeting, for which, practically everyone agrees, Hungary does not qualify].

The eleven economists who were consulted are: Zsigmond Járai, György Szapáry, Henrik Auth, Péter Ákos Bod, László Csaba, Károly Szász, Mihály Arnold, István Hamecz, Lőrinc Soós and István Töröcskei.

Their meeting was not called over news of the downgrade, said the unnamed sources, by the way. Since it came to power in May 2010, this was only the second time that the economic leadership of the country consulted with economists friendly to their political agenda: Hungary’s prime minister and minister of economy first met with the same group in early September. Another meeting is scheduled for the future, though its date has yet to be determined.

This entry was posted in György Matolcsy, Hungarian government, Hungary, IMF, Viktor Orbán and tagged , , . Bookmark the permalink.

1 Response to After Downgrade by Moody’s, Hungarian Government Gets Reality Check from Panel of Economic Advisors

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