Economy
Hungary at the crossroads: with or without the IMF?
By István Madár
A successful foreign currency bond issuance would make Hungary’s government feel that in terms of funding it is in the clear until at least the elections in 2014. So for what other reason would it want financial assistance from the International Monetary Fund (IMF)? We tell you why: growth.
The choice to nod on or nix an IMF/EU deal has arisen quite unexpectedly for the Hungarian cabinet. This “freedom" came out of the blue, although the elbowroom of the government's economic policy has been palpably expanding this year. The forint bond auctions - thanks to the high yields - were successful and households’ appetite for local government securities also increased. This is how the theoretical deadline by which the state would exhaust its liquid funds as a result of no access to the FX bond market got gradually pushed further and further out in time. For a brief period in the spring it even occured that Hungary might take out an FX loan, although the associated risks finally convinced the cabinet to act rationally and resist the temptation.
At the same time, due to the woes burdening the Spanish and Greek economies and the failure to raise exotic funds the government had every right to think even in early September that it will need the IMF’s assistance so that it wouldn’t have to be on the razor’s edge until the elections in the spring of 2014. Then came the European Central Bank’s (ECB) unlimited bond-buying programme (which is not that unlimited by the way) and the Federal Reserve announcing QE3. And the world has blossomed.
In this favourable situation a number of large investment banks would be willing to manage an FX bond issuance and even independent experts believe that selling a couple billion euros worth of debt should not be a problem. Putting an FX bond issuance under its belt the cabinet would feel set to forget about funding problems for this governing cycle, as it may not even have to raise any more FX funds until 2014. It would only need to make sure its HUF debt auctions are unproblematic.
In other words, for the first time since it announced returning to the IMF for aid in November 2011, the government could honestly think not signing a deal with the IMF/EU is a viable alternative.
Needless to say, such a call carries a host of positive and negative risks, not to mention the long list of political and economic benefits and costs, which would require a deeper analysis to address. At this point, however, we just wanted to point to a single element in these.
How different can Hungary’s economic policy be with and without and IMF deal then? Assuming that under the banner of the fight against public debt the government will leave the budget deficit path as it is, the main question for the short term is how this will be achieved. But the answer to this short-term question has longer-term consequences.
We suspect that the path treaded by the government without the IMF on its side would be more ragged and the outlook on growth would not be so nice. And it is not only the unorthodox measures taken so far and the forlorn growth picture that make us say that. No, it is also because of forward-looking considerations why we have that feeling.
(1) If the government refrains from any kind of “austerity-type" measure then (in the first round) we should expect steps that will deliver a blow to the business sector, which could take the already dramatically feeble investment activity to further depths.
(2) One of the main problems of the Hungarian economy is the lack of credibility of economic policy. It can hardly be restored in any other way in the short term than by importing credibility.
(3) The weak lending activity is one of the main obstacles to economic growth. In order to change that the cabinet may need to come to terms with the banks, just like it agreed with them when it secured the IMF-led credit facility in 2008. If the deal is not made or it just remains in the air for who knows how long then the withdrawal of funds may be accelerated rather than slowed down.
(4) Some of the politically less sensitive adjustment measures may be applied only to buy time: the required fiscal consolidation could be dragged out in time by temporary balance-improving steps. Sans an IMF deal political rationality will probably nudge economic policy in this direction.
In the economics literature of fiscal adjustments, the consensus on the whole is that a country can be successful if it is able to convince those losing out on the adjustment that they do have a chance for future gains. But if a rational economic player sees nothing else on the road ahead but one hill of austerity after another then business confidence will deteriorate further and the adjustment process will demand even larger real economic sacrifices. Needless to say, an IMF deal is not a magic wand and the business sector’s situation will not improve at the flick of a wrist. It is possible that by the time of the elections we would see only minor progress in this respect.
(5) We do not want to go into it now, but let’s just accept that even in a relatively favourable global environment Hungary’s financial stability risks are different if there’s an IMF-provided financial backstop than without it. Firstly, this is reflected - even when we disregard extreme scenarios - in risk premia and the level of interest expenditures for the budget.
(6) Secondly, monetary easing would carry a lot smaller stability risks with than without an IMF deal. Or if we approach the subject from the other direction: it would hardly be without risks if the central bank started to cut rates at a mad pace with a new Governor from March 2013, while credibility is not established and there is no safety net provided by the Fund.
In view of the aforementioned arguments we can say that for rational government player focusing on the 2014 elections it is starting to make more and more sense to consider not signing a credit agreement with the IMF. This would keep the political costs lower, but the longer-term economic costs could be higher. This is a classic time inconsistency situation: a rational short-term behaviour of politicians are in conflict with an economic policy that is rational in the longer term and optimal from sustainable growth aspects. We will not have to wait an awful lot to find out which line of thinking comes out on top.
A successful foreign currency bond issuance would make Hungary’s government feel that in terms of funding it is in the clear until at least the elections in 2014. So for what other reason would it want financial assistance from the International Monetary Fund (IMF)? We tell you why: growth.
The choice to nod on or nix an IMF/EU deal has arisen quite unexpectedly for the Hungarian cabinet. This “freedom" came out of the blue, although the elbowroom of the government's economic policy has been palpably expanding this year. The forint bond auctions - thanks to the high yields - were successful and households’ appetite for local government securities also increased. This is how the theoretical deadline by which the state would exhaust its liquid funds as a result of no access to the FX bond market got gradually pushed further and further out in time. For a brief period in the spring it even occured that Hungary might take out an FX loan, although the associated risks finally convinced the cabinet to act rationally and resist the temptation.
At the same time, due to the woes burdening the Spanish and Greek economies and the failure to raise exotic funds the government had every right to think even in early September that it will need the IMF’s assistance so that it wouldn’t have to be on the razor’s edge until the elections in the spring of 2014. Then came the European Central Bank’s (ECB) unlimited bond-buying programme (which is not that unlimited by the way) and the Federal Reserve announcing QE3. And the world has blossomed.
In this favourable situation a number of large investment banks would be willing to manage an FX bond issuance and even independent experts believe that selling a couple billion euros worth of debt should not be a problem. Putting an FX bond issuance under its belt the cabinet would feel set to forget about funding problems for this governing cycle, as it may not even have to raise any more FX funds until 2014. It would only need to make sure its HUF debt auctions are unproblematic.
In other words, for the first time since it announced returning to the IMF for aid in November 2011, the government could honestly think not signing a deal with the IMF/EU is a viable alternative.
Needless to say, such a call carries a host of positive and negative risks, not to mention the long list of political and economic benefits and costs, which would require a deeper analysis to address. At this point, however, we just wanted to point to a single element in these.
How different can Hungary’s economic policy be with and without and IMF deal then? Assuming that under the banner of the fight against public debt the government will leave the budget deficit path as it is, the main question for the short term is how this will be achieved. But the answer to this short-term question has longer-term consequences.
We suspect that the path treaded by the government without the IMF on its side would be more ragged and the outlook on growth would not be so nice. And it is not only the unorthodox measures taken so far and the forlorn growth picture that make us say that. No, it is also because of forward-looking considerations why we have that feeling.
(1) If the government refrains from any kind of “austerity-type" measure then (in the first round) we should expect steps that will deliver a blow to the business sector, which could take the already dramatically feeble investment activity to further depths.
(2) One of the main problems of the Hungarian economy is the lack of credibility of economic policy. It can hardly be restored in any other way in the short term than by importing credibility.
(3) The weak lending activity is one of the main obstacles to economic growth. In order to change that the cabinet may need to come to terms with the banks, just like it agreed with them when it secured the IMF-led credit facility in 2008. If the deal is not made or it just remains in the air for who knows how long then the withdrawal of funds may be accelerated rather than slowed down.
(4) Some of the politically less sensitive adjustment measures may be applied only to buy time: the required fiscal consolidation could be dragged out in time by temporary balance-improving steps. Sans an IMF deal political rationality will probably nudge economic policy in this direction.
In the economics literature of fiscal adjustments, the consensus on the whole is that a country can be successful if it is able to convince those losing out on the adjustment that they do have a chance for future gains. But if a rational economic player sees nothing else on the road ahead but one hill of austerity after another then business confidence will deteriorate further and the adjustment process will demand even larger real economic sacrifices. Needless to say, an IMF deal is not a magic wand and the business sector’s situation will not improve at the flick of a wrist. It is possible that by the time of the elections we would see only minor progress in this respect.
(5) We do not want to go into it now, but let’s just accept that even in a relatively favourable global environment Hungary’s financial stability risks are different if there’s an IMF-provided financial backstop than without it. Firstly, this is reflected - even when we disregard extreme scenarios - in risk premia and the level of interest expenditures for the budget.
(6) Secondly, monetary easing would carry a lot smaller stability risks with than without an IMF deal. Or if we approach the subject from the other direction: it would hardly be without risks if the central bank started to cut rates at a mad pace with a new Governor from March 2013, while credibility is not established and there is no safety net provided by the Fund.
In view of the aforementioned arguments we can say that for rational government player focusing on the 2014 elections it is starting to make more and more sense to consider not signing a credit agreement with the IMF. This would keep the political costs lower, but the longer-term economic costs could be higher. This is a classic time inconsistency situation: a rational short-term behaviour of politicians are in conflict with an economic policy that is rational in the longer term and optimal from sustainable growth aspects. We will not have to wait an awful lot to find out which line of thinking comes out on top.
