Economy
Hungary on Argentine path, but it's not late to turn back - Kopits
Kopits kicks off by assessing the right-of-centre cabinet’s work so far, saying that since assuming power with an overwhelming parliamentary majority in May 2010, Prime Minister Viktor Orbán’s government has adopted “a string of unpredictable economic policies."
“Ministers boasted about adopting an unorthodox strategy that would lead to at least 5% growth and trim the public debt ratio—in excess of 80% of GDP—inherited from the outgoing Socialist government."
“Key elements of the strategy included so-called crisis taxes on selected activities, a hike in the standard VAT rate (to an international record of 27%), and forced transfer of defined-contribution private pensions into the defined-benefit public pension system. In addition, the government proceeded to weaken the courts and other independent institutions by appointing politically loyal heads or narrowing significantly their mandate," Kopits said in the WSJ.
“The campaign to defang independent institutions peaked just before New Year's Day, when the parliament voted to amend the central-bank law. In the past, nearly every government has been critical of the National Bank of Hungary," he added.
Kopits reminded that former PM Ferenc Gyurcsány attempted to influence the monetary council by packing it with four additional members.
“As it turned out, most of these members acted on the basis of professional judgment, disregarding the government's wishes," he added.
In Kopits’s view, however, the most recent modification “goes much further in paving the way for political interference—mainly through appointment of a new deputy governor—including in the management of foreign-exchange reserves."
“The purpose of these steps is clear. Senior government officials have criticized recent increases in the base interest rate—made necessary by the self-inflicted rise in risk premium—and proposed earmarking some of the central bank's reserves for off-budget public spending," said Kopits who had also been member of the rate-setting MPC for five years.
While Orbán’s publicly voiced objective is to secure fiscal sovereignty for Hungary, Kopits said this means but “maximizing the scope for financing populist handouts and perpetuating the government's hold on power, while pretending to comply with the limits on public debt and deficits under the EU Stability and Growth Pact."
“The systematic destruction of checks and balances resembles closely the institutional erosion that has taken place in Argentina and Venezuela, including nationalization of private pension funds, capricious taxation of the export sector, and political interference with the judiciary," Kopits added.
He is not alone who holds this view, though.
"If the government gets the right to assign the deputy governors then it means the Hungarian central bank’s decisions will eventually become influenced by the fiscal authorities, which may lead to pro-cyclical policies," said Aurelija Augulyte, analyst at Nordea, Copenhagen in a research note in mid-Dec11.
"This risks destabilizing both the economy and the financial markets. In the worst case it risks ending up in á la Argentina scenario, where central bank effectively becomes a public sector funder," she added.
“Hungary can ill-afford to alienate financial markets much longer," said Kopits, reminding the skyrocketed risk premium on government debt and the substantial depreciation of the forint," Kopits said.
He also noted that since joining the EU, Hungarian governments have not shied away from confrontation with EU institutions, but “this has reached a new high with enactment of the new central-bank law."
The move has not only derailed the prospects for EU and IMF financial support, but could possibly lead to EU sanctions and the suspension of the country’s voting rights in these institutions if this move is interpreted as a violation of treaty obligations.
“The time has arrived for Mr. Orban to reflect and draw some quick lessons from the recent past. It is not too late to step back from the collision course ahead. Specifically, he may want to consider reinstating the law passed a decade ago by his first government, which established central-bank independence," Kopits said.
He also urged Orbán to “assign priority to implementing and strengthening a package of reforms announced last March but placed on the backburner, along with tangible steps to restore the integrity of the neutered institutions."
“Financial markets and EU member governments are ready to welcome such shift from a perilous experiment. Ironically, in the event, Hungary would soon enjoy the benefits of genuine fiscal sovereignty, much like the other Visegrad economies," Kopits concluded.
“Ministers boasted about adopting an unorthodox strategy that would lead to at least 5% growth and trim the public debt ratio—in excess of 80% of GDP—inherited from the outgoing Socialist government."
“Key elements of the strategy included so-called crisis taxes on selected activities, a hike in the standard VAT rate (to an international record of 27%), and forced transfer of defined-contribution private pensions into the defined-benefit public pension system. In addition, the government proceeded to weaken the courts and other independent institutions by appointing politically loyal heads or narrowing significantly their mandate," Kopits said in the WSJ.
“The campaign to defang independent institutions peaked just before New Year's Day, when the parliament voted to amend the central-bank law. In the past, nearly every government has been critical of the National Bank of Hungary," he added.
Kopits reminded that former PM Ferenc Gyurcsány attempted to influence the monetary council by packing it with four additional members.
“As it turned out, most of these members acted on the basis of professional judgment, disregarding the government's wishes," he added.
In Kopits’s view, however, the most recent modification “goes much further in paving the way for political interference—mainly through appointment of a new deputy governor—including in the management of foreign-exchange reserves."
“The purpose of these steps is clear. Senior government officials have criticized recent increases in the base interest rate—made necessary by the self-inflicted rise in risk premium—and proposed earmarking some of the central bank's reserves for off-budget public spending," said Kopits who had also been member of the rate-setting MPC for five years.
While Orbán’s publicly voiced objective is to secure fiscal sovereignty for Hungary, Kopits said this means but “maximizing the scope for financing populist handouts and perpetuating the government's hold on power, while pretending to comply with the limits on public debt and deficits under the EU Stability and Growth Pact."
“The systematic destruction of checks and balances resembles closely the institutional erosion that has taken place in Argentina and Venezuela, including nationalization of private pension funds, capricious taxation of the export sector, and political interference with the judiciary," Kopits added.
He is not alone who holds this view, though.
"If the government gets the right to assign the deputy governors then it means the Hungarian central bank’s decisions will eventually become influenced by the fiscal authorities, which may lead to pro-cyclical policies," said Aurelija Augulyte, analyst at Nordea, Copenhagen in a research note in mid-Dec11.
"This risks destabilizing both the economy and the financial markets. In the worst case it risks ending up in á la Argentina scenario, where central bank effectively becomes a public sector funder," she added.
“Hungary can ill-afford to alienate financial markets much longer," said Kopits, reminding the skyrocketed risk premium on government debt and the substantial depreciation of the forint," Kopits said.
He also noted that since joining the EU, Hungarian governments have not shied away from confrontation with EU institutions, but “this has reached a new high with enactment of the new central-bank law."
The move has not only derailed the prospects for EU and IMF financial support, but could possibly lead to EU sanctions and the suspension of the country’s voting rights in these institutions if this move is interpreted as a violation of treaty obligations.
“The time has arrived for Mr. Orban to reflect and draw some quick lessons from the recent past. It is not too late to step back from the collision course ahead. Specifically, he may want to consider reinstating the law passed a decade ago by his first government, which established central-bank independence," Kopits said.
He also urged Orbán to “assign priority to implementing and strengthening a package of reforms announced last March but placed on the backburner, along with tangible steps to restore the integrity of the neutered institutions."
“Financial markets and EU member governments are ready to welcome such shift from a perilous experiment. Ironically, in the event, Hungary would soon enjoy the benefits of genuine fiscal sovereignty, much like the other Visegrad economies," Kopits concluded.
