Felix Salmon

Good news from Hungary

By Felix Salmon
July 19, 2010

Remember the storm-in-a-teacup Hungary crisis, back in June? Global markets all tumbled on fears about Hungarian austerity, of all things. It was all a bit weird for two reasons: firstly, the crisis was caused by remarks from a brand-new and wholly inexperienced incoming government, which had yet to find its legs or implement any policies at all. And secondly, Hungary is not a part of the eurozone, so there was no chance of a broader euro crisis resulting from what went on there: in the worst case scenario, the forint would simply weaken. The obvious conclusion was that markets were just looking for any excuse to plunge.

Today, Hungary blew up all over again, the forint fell by more than 2%, and debt spreads widened out to their early-June levels, as austerity talks with the IMF fell apart. This was, on its face, a more credible crisis: it was caused by a real failure rather than just talk. But markets outside Hungary didn’t seem to notice, and neither the forint nor Hungarian spreads have yet found themselves at noticeably worse levels than they saw in June.

In June, I described the Hungary crisis as “just another one of those random triggers which might normally have been easily ignored, but which was simply the excuse that jittery and volatile markets needed to sell off sharply”. So I’m not surprised that markets were sanguine today: lightning rarely strikes twice in the same spot.

I wonder how people are feeling at the IMF today. Gordon Fairclough reports that “one way the IMF can encourage compliance is to suspend talks with borrowers and allow a punishing market reaction” — but it seems that Hungary can easily weather this particular punishment, so long as it doesn’t get any worse.

So all of this is good news, I think: global markets are less prone to panic, and even Hungarian markets seem to have made peace with the idea that there might not be an IMF backstop for the time being. Maybe the “new normal” is, slowly, becoming normal.

4 comments so far | RSS Comments RSS

Sorry, Felix, your info is inaccurate. The new Hungarian government is far from “brand-new and wholly inexperienced”. They were in power between 1998 and 2002 with the same prime minister and economy minister. Their problem is not inexperience, but a baggage of demagogue undermining of their predecessors, claiming that austerity was unnecessary and tax cuts should be brought in instead to jump-start the economy. Now they are in a bind, because the naive electorate actually expects them to do what they preached.

Posted by greg101 | Report as abusive

I fail to see how backing away from a loan that can stabilize the country is a good move. Perhaps they should follow the guidelines and reduce their debt as a requirement for seeking more help. What is wrong with the
IMF setting a guideline?

Posted by tkotrade | Report as abusive

1. In several ways I am not really pleased with this Hungarian government in this respect,
2. First they make now for the second time negative noise in the EU while that area as a whole should be stabilized.
3. Second they promissed things any realistic person would know they could not keep.
4. At the end of the day they will have to give in anyway.
-They have reserves till november approx. if the donot have money before that they will be in deep trouble.
-EU donor countries cannot explain this (agreeing with Hungary) to their voters. Same IMF position vis-a-vis other rescue countries. So EU and IMF will not give in, why fight if you know you are going to loose.
5. It shows again that poorer countries only like solidarity when it is going into their direction, like the Slovakian approval drama.
6. It is opening up because of this a lot of discussion on voter level in EU-donorcountries about several money flows, which could never be possitive for countries like Hungary.
7. So the only 2 reasons they could be doing this are: lack of economic common sense and a show for their voters or a combination thereof.
8. Especially the second reason again could make their long term position as a considerable EU nett receiver more difficult. The North’s voters start to have enough of all kind of money drains in other (easy predictable) countries especially as they are already paying 45-50% of their income on tax and likely have their pensiondate moved to 70. The more they are remembered thereof the more likely changes will happen.

Posted by Rikh | Report as abusive

A very balanced piece – and probably right. But beware the Party now in power…they are populists of the worst kind. It was a smart(ish) move of the IMF to fire a shot across their bows…I sense they figured a battle now might obviate a war later.

I do note, however, that the IMF sent a not entirely coded message to the G20 over the weekend, the gist of which was ‘we need more money if we’re gonna get through this minefield’.

Tell me, is it me – or is a deadly combination of greed, stupidity, speed and complexity now making investment analysis something of a mug’s game? This might apply….

http://nbyslog.blogspot.com/2010/07/inve stment-object-lesson-in-why-small.html

Posted by nbywardslog | Report as abusive

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