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Hungary defies the IMF

by Open-Publishing - Sunday 15 August 2010

Europe Extreme right Governments

Hungary defies the IMF

by Jérome Duval*

All bets are off between the IMF and the conservative Hungarian Prime Minister Viktor Orban. What’s bitten the former golden boy of the Atlanticists for him to suddenly want to introduce taxes on financial profits when it would be easy to raise additional taxes on work? And what if Mr Orban is right, asks Jérome Duval.

14 AUGUST 2010

Viktor Orban, Prime Minister (1998-2002 and since 29 May 2010)
Hungary, which will assume the EU presidency for 6 months beginning 1 January 2011, has suffered heavily from the financial crisis which is not yet over. Although only marginally off the Maastricht rule regarding annual budget deficits (3.8% in 2008), Hungary has become the first EU country to obtain financial support from the IMF/EU/World Bank troika.

In October 2008, a rescue plan of €20 billion was established for Hungary: €12.3 billion from the IMF, €6.5 billion from the EU and €12 billion from the World Bank. The quantum of the debt increases automatically. Besides the dead loss of interest payments on the debt, the conditions are severe for the population: the VAT raised by 5%, now stands at 25%; the retirement age raised to 65, the freezing of public sector salaries for two years; cancellation of the thirteenth month payment from retirement contributions [*]; reduction of public assistance to agriculture and public transport, and so on.

The extreme right enters Parliament

Hungary, previously governed by the Social-Democrats, has succeeded in safeguarding a relatively protective social system, but the application, under instructions from the IMF, of such austerity measures has upset the population and benefited the conservative Right which has carried the Parliamentary elections in April 2010. Nevertheless, the victory of the new conservative Prime Minister, Viktor Orban, was readily welcomed by the ratings agency Fitch which considered that his Party, the Fidesz [Civic Union], having gained the necessary majority to modify the Constitution, "represents an opportunity to introduce structural reforms” [1]. The Social-Democrats have thus experienced an historic defeat, creating an opening for the extreme Right (Jobbik) which has entered Parliament for the first time with a 16.6% share of the vote.

Barely in place, the government started making alarmist declarations on the country’s financial situation due to an underestimation of accounts by the previous government bringing the budget deficit to 7.5% of GDP, a much higher level than the 3.8% expected by the IMF. A bluff or a falsification of the accounts? The next day, 5 June 2010, a panic wave hit the stock exchanges of London, Paris, Budapest … and the euro dropped in fear of difficulties comparable to those of Greece. Under pressure, the government attempted to backtrack, issuing statements to calm the frenzied speculators as best as possible.

To tax capital or work?

To reduce its budget deficit to 3.8% of GDP in 2010 as demanded by the IMF and the EU, the government is planning to impose a temporary tax on the entire financial sector, which will levy 0.45% of the net assets of banks (calculated not on profits but on turnover), a tax of 5.2% on insurance company revenues and of 5.6% for other financial entities (the stockmarket, brokers, managed funds, etc.). Hungary is thus outdoing Obama who has timidly called for a tax of only 0.15% on the banks. But this measure which is due to yield about €650 million annually for two years (2010 and 2011), estimated at around 0.8% of GDP according to the government, is rubbing the banks the wrong way: they are pressing the government and threatening to withdraw their capital from Hungary. As for the IMF, it has stopped all negotiations and is threatening to close the tap on the credit granted in 2008. The plan, initially due to expire in March 2010, has however been extended until the coming October.

Obviously, the real bone of contention between the IMF and Hungary is the the plan to tax the financial sector, which is blocking the continuation of the loan. The IMF reckons that the country must take measures in harmony with the current neoliberal dogma, meaning by that the poor should be taxed before the banks; certainly, the poor have little money but there are a lot of them. Should not one notice the cynicism at work? More, the project to put a ceiling on remuneration in the public service, the salary of the governor of the central bank included, is entirely poles apart from the Fund’s recommendations which prefer a leveling down by reducing or freezing wages as in Greece or Romania for example. At the same time, let’s be careful to have no illusions about a Party in power which has already encouraged the penetration of neoliberalism in the 1990s.

It is either the bank tax or austerity

Christoph Rosenberg, who led the IMF delegation in Hungary, indicated that the international organisation hoped to obtain more details on next year’s budget: “When we come next time – unless we come back next week — the government will obviously have made more progress on the 2011 budget, which will be a very important budget”, he said [2]. Yet again the IMF is ready to look over the government’s plans and intervene directly in the Hungarian budgetary process at the expense of its sovereignty. Meanwhile, the IMF considers that the country must take ‘additional measures’ of austerity to meet the deficit objectives that it itself has fixed. From his side, the Economy Minister Gyorgy Matolcsy has claimed during an interview: “We have told our partners that further austerity packages are out of the question. … Hungary has experienced a programme of austerity over the past five years, we inherited this from the previous governments and we would like to do away with the unfortunate consequences of these steps … We are going to impose the bank tax, we know that it is a heavy supplementary burden, but we know equally that we are able to achieve [the objective of] a deficit of 3.8%”. “It is either the bank tax or austerity”, he added [3]. To protect itself from an extreme Right in rapid ascent at the time of the next municipal elections beginning October, the conservative Right in power wants to avoid highly unpopular measures and has rejected continued negotiation with the IMF.

Rupture between Hungary and the IMF confirmed?

On the 17 July the IMF suspended negotiations and, as a result, the payment of new loan instalments. First, market sanctions kicked in straight away and the national currency, the forint, retreated about 2.4%, while the stockmarket lost more than 4%. Then the Prime Minister, Viktor Orban, jumped in and succeeded to curb speculation by thanking the IMF for its “help over three years”, while indicating that “the loan agreement is to expire in October, and that there was thus nothing to suspend.” “The banks were the source of the global crisis; it is natural they should contribute to reestablishing” the situation, he underlined [4].

The new law on the financial tax which foreshadows, in addition, a reduction in the tax on small and medium enterprises (SMEs) of 16 to 10%, was approved easily (301 votes in favour and only 12 against) on 22 July by a Parliament dominated by Orban’s Fidesz Party. Unsurprisingly, the day after, the rating agencies put the grading of the Hungarian sovereign debt under surveillance with a possible lowering as a consequence. The role of these agencies, judge and jury of a deadly speculative system, can be readily summarised: they improve the country’s rating when a conservative government comes to power, judging it will follow the path of capitalist austerity, and rush to lower the rating as soon as they realise that government measures are heading away from the neoliberal dogma.

Le Monde supports the creditors

Contrary to the statement by French daily Le Monde [5] on 20 July, one must support the Hungarian government’s open insubordination towards the IMF and to defend the idea that it should do the same with its other creditor, the EU. Moving away from the creditors is not an insult to the Hungarian people who must in the end repay a debt subjected to IMF and EU conditions which already represent a heavy burden.

Of course, it is necessary to go beyond a simple diplomatic rupture in proposing, for example, a coalition of countries united against payment of the debt for, as was so well put by [Thomas] Sankara, former President of Burkina Faso, some months before being assassinated: “The debt cannot be repaid, first, because if we don’t repay, our creditors will not die. That’s for sure. But, on the contrary, if we repay, we are going to die. Let’s be equally sure of that. … If Burkino Faso alone refuses to pay, I will not be here for the next conference! But with everybody’s support, which I need [applause], we can avoid repaying. And in avoiding repayment we can devote our meagre resources to our own development.” [6]. Only a popular mobilisation calling for the truth regarding the use of the borrowed money and the satisfaction of demands in terms of wages, jobs or social protection will allow us to pin the cost of the crisis on those who are genuinely responsible for it.

This is why it is vital for the European nations, and elsewhere, to audit these debts tainted by illegality so as to repudiate their payment. This is a first step towards a sovereignty which would allow the shifting of the enormous sums dedicated to debt towards the real needs of the populations with respect to health, education or retirement pensions, of safeguarding their public services rather than handing them to private enterprise.

Jérome Duval
Membre du réseau international du Comité pour l’Annulation de la Dette du Tiers Monde. A ce titre, il participe à la 5ème mission internationale au Honduras suite au coup d’Etat renversant le président constitutionnel Manuel Zelaya (2009).