Hungary’s contribution to the debt and austerity conference on 31st May 2011 in Brussels

6 June 2011 by Matyas Benyik


Gross and net external debt

Hungary’s financial system is market-based and about 80% is owned by foreign banks (mainly from Austria and other EU countries). During the last decade, this ownership structure was wrongly considered to be a factor in reducing external vulnerability and increasing domestic (and international) competitiveness.

The gross external debt started to increase in an excessive way at the beginning of 2006, when the debt of the private sector (business and households) exceeded the public one. By 2009 the 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 private debt exceeded 70% of external debt, which is a huge problem because the private debt is mainly denominated in Swiss francs and partly in euro. The rapidly growing exposure of consumer credits raised in foreign currency (due to huge differences between the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
in the Hungarian forint and in other major currencies) contributed to Hungary’s rapidly growing external indebtedness. By the end of 2008, gross external debt amounted to €98.5 bn, or almost 100% 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.
. Net debt climbed to €54.4 bn. This figure and the fact that net debt was less than three-quarters of commodity exports reflect a much better position than at the beginning of the transformation in 1990. The big difference, however, was that while in 1990 almost 100% of the debt fell on the government and the Hungarian National Bank, in 2008 the debt of these actors was only 26% of the total, while that of private enterprises and particularly of households accounted for 74%.

Gross external debt of Hungary between 2000 and 2009 in billion of USD

(These figures represent the total public and private debt owed to non residents repayable in foreign currency, goods or services, calculated on an exchange rate basis)
Source: http://www.indexmundi.com/g/g.aspx?c=hu&v=94

When the global financial crisis broke out in October 2008, Hungary was in a very precarious economic situation. Although the government had introduced major budget cuts from 2006 to 2008, these cuts could not prevent the flood of international speculation that took place and which threatened to collapse the country’s economic and financial system. Immediate support
from the international financial intstitutions allowed Hungary to avert the most dramatic scenario. Nevertheless, the crisis underscored several weak points in the Hungarian system that could no longer be ignored, including:

- an extremely high exposure to foreign currency debt (mainly private sector);
- high levels of external debt financing;
- inflexible labor markets with a high share of inactivity;
- ambitious social welfare programs that overestimated the national economy’s performance and were to a large extent financed by foreign credits;
- low-productivity levels and largely rent-seeking domestic SMEs;
- premature consumerism sustained by (primarily) citizens taking on too much credit, which led to a negative savings rate in a country targeting fast-track modernization;
- sharp conflicts between the Socialists (MSZP) and the right wing party (FIDESZ);
- dangerous ideology-based polarization of the society.

In April 2010, Fidesz won a two-thirds majority in the parliamentary elections. Last automn it was confirmed also in the local elections. PM Viktor Orban’s politics are anti-communist, classical conservative, nationalistic and openly counter-revolutionary – with a great emphasis on family, church and nation – while his economics are hazier. Orban often speaks of over-privatization of the Hungarian economy and the need for strong Hungarian companies (this policy - as Joachim Becker pointed out - can be considered as „nationalist neo-liberalism or liberal nationalism”.)

During the last electoral campaign Fidesz promised to create one million jobs, stimulate economic growth and cut taxes. However, so far Fidesz’ decisions have increased the structural fiscal deficit and fixed the budget shortages through temporary measures (e.g. crisis taxes on the financial, retail, telecom and energy sectors, nationalized private pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
). Adding to the worries are actions with populist and occasionally anti-democratic tendencies, for example:

- Introduction of a controversial new media law requiring a balanced view determined be a committee dominated by Fidesz-allied members;
- Dismantling the critical budget committee and installing a new committee with limited powers;
- Putting pressure on the independency of the National Bank of Hungary (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.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
);
- Curbing the power of the Constitutional Court;
- Pinning its economic policy on a target of boosting growth above 5% by 2014 through cuts in the personal and corporate income taxes (by 16% and 10% respectively) in favour of the rich people the upper middle class and the SMEs;
- Giving Hungarian passport to all Hungarians living outside of Hungary (about 3-4 million people) stepping on sensitive toes of neighbouring countries;
- Changing the Constitution into a very conservative, nationalistic direction including the tenets of saint crown, advanced protection of marriages between men and women, etc.

Social and income situation

The social situation in Hungary is already catastrophic. More than one million of the country’s ten million inhabitants are no longer able to pay their electricity, gas and heating bills on time. If they fall three months into arrears, they face being cut off.

The number of employed persons in early 2011 was 3 million 745 thousand, which is 0.7% more than one year earlier. The employment rate rose a bit to 55.3%. In the first quarter of 2010 the number and rate of unemployed persons – within the 15–64 year-old age-group – reached the highest number of about half a million and rate of 11.9%, respectively.

The amount of monthly average net earnings reached HUF 139,600 (about EUR 500), which was 3.3% higher than in January 2010. This meant growths of 10.4% in the private and 5.4% in the non-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. sector, while in the public sector nominal net wages and salaries were down by 11.2%.

Pensions represent about two thirds of social transfers in cash in Hungary. In December 2010 the nearly 3 million people received pensions or retirement provisions, which meant three tenths of the population. The monthly average pension per capita was HUF 86,361 (about EUR 300) in 2010, 0.9% less in real terms than one year earlier.

Of family supports the real value of family allowance decreased by 5.0% in 2010. The number of families receiving family allowance lessened by 1.8% over a year. The purchasing power of child-care allowance went down by 5.7% in 2010, while the number of families receiving it expanded by 2.5% compared to 2009. The real value of child-raising support decreased by 5.3%, while the number of families receiving it by 2.5% over a year. The real value of child-care fee was down by 1.5%, while the number of recipients by 0.4%.

This year the rise of consumer prices slowed down compared to the beginning of 2010, prices rising by an average of 4.0% in January–February 2011. The price of food rose to the highest extent, by 6.9% compared to the first two months of 2010. Within this, high consumer price rises were recorded in February for flour (44%), sugar (28%) and seasonal food items (27%). In January–February higher-than-average price increases were observed in case of electricity, gas and other fuels (6.6%), and other goods, including motor fuels and lubricants (6.2%), too. Due to the different structure of consumption and the significant increase of food prices the consumer price index for pensioners was higher both in January and February (104.4% and 104.8%, respectively) than that for the population as a whole.

New austerity measures (Szell Kalman plan)  

Dubbed the “Szell Kalman” plan after a successful 19th century Hungarian Finance Minister, the proposals were intended to reassure investors that Hungary will avoid excessive state spending once the bank tax and other “temporary” crisis measures imposed last year have been withdrawn.

The long awaited government fiscal restructuring proposals were finally released at the beginning of March 2011. The focal point of the plan is to reduce the budget deficit to 1.9% of GDP by 2014 while cutting state debt to 66% of GDP.

The principal areas of adjustment focused on: health care, pensions, public transport and drug subsidies offering considerable scope for savings. The announced „reforms” are touching extremely deep-rooted problems and Fidesz is facing strong public opposition. It is very hard to make people believe that cutting drug susidies by one-third [by EUR 440 million in 2013-14] serves only „to avoid austerity measures”.

The government is facing growing criticism from a lot of workers who have discovered, to their cost, that the much-boasted 16% flat tax actually translates into a 20.5% levy on their headline income, and leaves many earning below the HUF 300,000 (EUR 1,100) a month threshold with less in their pocket than in 2010.

Many people are sceptical about the government’s ability to cut social transfers such as disability pensions with stricter checks on medical examinations and the creation of work places suitable for the genuinely disabled.

The new plan envisages raising the retirement age to 65, which will hit police and firefighters, who have until now enjoyed the luxury of taking full pension after just 20 years service - a most sensitive group of workers to alienate, particularly given Orban’s high profile drive to increase the number of police. And the austerity package also targets savings of HUF 60 billion (about EUR 220 million) in public transport in 2013-14. It seems that the government could alienate with these measures a lot of social groupings and the social resistance might be growing in the future.

Conclusion

1.) Hungary’s main problem is that the share of private debt is very high and denominated primarily in Swiss francs (and euro), while the exchange rates are extremely volatile and the national currency is exposed to currency speculations.

2.) The social situation in Hungary is already catastrophic. About one third of the population is considered as poor. More than 1 million of the inhabitants are no longer able to pay their electricity, gas and heating bills on time and service providers can cut supplies in any moment.

3.) The recently introduced flat tax system and the new austerity measures (Szell Kalman plan) will certainly lead to further social degradation and aggrevate the poverty in Hungary.

Budapest, 15th May 2011.



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Matyas Benyik

Matyas Benyik is a member of ATTAC Hungary

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