Hungary’s Real Defiance

From MSN Money

From MSN Money

Analysis: EU sweats over how to bring Hungary into line | Reuters.

Hungary Amends Laws, in Snub to EU, U.S. – WSJ.com.

Hungarian PM pushes for state bank, rebuffs foreign critics | Reuters.

The EU is expressing displeasure at Hungarian Prime Minister Orban’s recent moves to consolidate power.  His party has passed laws eroding the independence of both the Constitutional Court and the central bank.  Additionally, Orban’s government is under criticism for restricting media rights, defining a family as a married man and woman and their children, banning certain kinds of political ads and not allowing homeless people to live on streets.

Arguably, the Western democracies complaining of Hungary’s new laws have all passed similar measures.  The real reason that the EU is pressuring Hungary is Orban’s promise to allow Hungarians to pay back loans originated in euros or Swiss francs in Hungarian forints.

The Eurocrisis is really about supporting the banks.  The Greek bailout was a actually a bailout of German and French banks stuffed to the rafters with debt from both the Greek government and businesses.  The Irish bailout was meant to make the German banks holding Irish bank bonds whole.

German, Austrian and Swiss banks have loaned a lot of euros and francs to Hungarians.  If these loans are paid back in forints, these banks will take large losses.  The one guiding star in Eurozone politics is that banks are not permitted to fail.

A swath of loans becoming denominated in forints rather than hard currency will require politically challenging bank bailouts.  It is much easier to apply pressure to Hungary to back off its redenomination promise rather than explaining to taxpayers why another bank needs another €10bn.

Hungary is caught in a perilous position.  It’s economy is mired in recession, so it should lower interest rates.

Hungary GDP Growth

However, the inflation rate remains persistently high.

Hungary CPI

Meanwhile, European banks have a lot of their own problems and have been steadily reducing lending to foreign markets including Hungary:

Hungary Loans to the Private Sector

The Hungarian government has a plan to address these issues.  Despite its protestations to the contrary, Hungary wishes to weaken the forint to spur exports.  Since a weaker forint will increase the cost of servicing foreign currency loans, Orzan plans to avoid this consequence by allowing those loans to be redenominated in the domestic currency.  This action will cause foreign banks to reduce their lending even further in a riskier Hungary, so the government has a state-owned savings bank ready to step into the breach to loan Hungarian businesses money.

This plan is an alternative to the austerity that has been slipped around the neck of struggling Eurozone countries.  The EU is concerned that Hungary’s alternative plan may actually work just like it did in Iceland.  When countries begin acting in their best interests, the fear is that Eurozone countries may reassess their commitment to austerity and begin implementing other plans that do not include the euro.

When Europe flew apart in 1914, the main participant in the events leading up to the war was Austria-Hungary.  Ironically, it may find itself in a similar position in a few months.

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One thought on “Hungary’s Real Defiance

  1. Not concerned at all that Hungary’s plan will work. It won’t. Highly concerned that as soon as it becomes obvious to the Hungarians that the plan failed, the Hungarian government will do the thing many governments do when their economic position becomes untenable – start a small distraction war, eg against Romania, supporting the poor oppressed Hungarians there.

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