Hungary defies the IMF

16 August 2010 by Jérôme Duval

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 IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
/EU/World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.


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 Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. 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 Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. 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 GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
, 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 Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. 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 Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

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 Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s :
put the grading of the Hungarian sovereign debt Sovereign debt Government debts or debts guaranteed by the government. 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.

Translation: Evan Jones and Delphine Rabet.


[2Krisztina Than et Marton Dunai, “IMF and EU suspend talks with Hungary”], Reuters, 17 July 2010.

[3Gergely Szakacs et Krisztina Than, “Hungary rules out austerity to IMF/EU”, Reuters, 19 July 2010; the French version, reproducing varied select quotations from Matolscy: “La Hongrie exclut de nouvelles mesures d’austérité”..

[5Editorial, “En Hongrie, les curieuses manières de M. Orban”, Le Monde, 19 July 2010

[6”Speech by Thomas Sankara at the Organization of African Unity Summit, Addis Ababa, 29 July 1987, some months before his assassination..

Jérôme Duval

member of CADTM network and member of the Spanish Citizen’s Debt Audit Platform (PACD) in Spain ( He is the author, with Fátima Martín, of the book Construcción europea al servicio de los mercados financieros (Icaria editorial, Barcelona 2016) and he also co-authored La Dette ou la Vie (Aden-CADTM, 2011), which received the award for best political book in Liège (Belgium) in 2011.



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