Bloomberg News

Hungarian Opponent of Soviets Finds Unlikely Foe in EU-IMF

January 16, 2012

(Updates with IMF comments in seventh, 25th paragraphs.)

Jan. 13 (Bloomberg) -- As an unshaven student leader in the 1980s, Viktor Orban urged his fellow Hungarians to reject Soviet rule and embrace democracy. Now, as prime minister, he’s fighting western capitalists in the name of freedom.

Orban is trying to secure loans to avert a debt default this year after saying as recently as November that Hungary could cope alone. The International Monetary Fund and the European Union are balking because of the 48-year-old leader’s increasing control over the courts and the central bank.

“Orban thinks this is 1990 all over again, with new rules being written and no time for compromise,” Zoltan Lakner, who teaches political science at ELTE university in Budapest, said in an interview. “Orban stood out for his boldness, for throwing caution aside and for his confrontational style” when negotiating with the communist regime, he said.

While Hungary remains outside the euro, it carries all the hallmarks of the currency’s crisis: borrowing costs near records in the bond market, junk status at rating companies and anti- government protests. As the nation’s most powerful premier since the collapse of communism, Orban is now faced with agreeing on a deal or risking economic collapse in a nation that first asked for aid in October 2008, more than a year before Greece.

“The IMF wants to intervene in Hungary to remove a burning issue in the euro area’s backyard,” said Agnes Belaisch, a former IMF economist who now helps manage $2.5 billion in emerging-market debt funds at Threadneedle Asset Management in London. “Lending to Hungary is important so there’s no piling up of debt problems.”

‘Public Scrutiny’

Hungary needs an IMF bailout in the first half of the year to restore market confidence, Paul Rawkins, head of the emerging Europe sovereign ratings group at Fitch Ratings, told Bloomberg Television on Jan. 10.

The IMF needs to see “tangible steps” from Hungary that show “strong commitment” on economic-policy issues before the lender of last resort decides “when and whether” to start formal negotiations on a bailout, Managing Director Christine Lagarde said yesterday in Washington after meeting Tamas Fellegi, Hungary’s chief negotiator.

“In 1989, our strongest weapon was public scrutiny and this is still the case,” Orban told reporters yesterday at the parliament in Budapest. “Transparency is Hungary’s most important asset in the IMF talks. Let’s discuss everything honestly and openly. We are ready to accept everything they say as long as it’s rational and good for Hungary.”

Orban rose to prominence on June 1 of that year at the reburial of Imre Nagy, the spearhead of the failed anti-Soviet uprising of 1956. Standing beside the coffins of Nagy and four other leaders of the uprising, the bearded 26-year-old called on Hungarians to “end the communist dictatorship.”

Berlin Wall

Five months after Nagy’s funeral, the Berlin Wall fell, and Hungary began its transformation to democracy. In 1989, Orban also began studying British liberal political philosophy at Oxford’s Pembroke College on a scholarship from Hungarian-born investor and philanthropist George Soros.

Orban won a seat in 1990 in the first post-communist election after co-founding Fidesz, a Hungarian acronym for the Alliance of Young Democrats and the party he still leads.

He turned the party into the main, nationalist opposition to the Socialist Party, which had been born out of the former communist regime. He became prime minister for the first time in 1998 with Fidesz in coalition with a populist farmers’ group, the Independent Smallholders Party. At the age of 35, Orban was Europe’s youngest leader at the time.

He steered Hungary towards EU membership it ultimately gained in 2004 as annual economic growth averaged 4.6 percent. He had been ousted two years earlier by the Socialist Party, which raised public wages and pensions.

Budapest Riots

In 2006, Orban, after losing his second consecutive election, seized on then-Prime Minister Ferenc Gyurcsany’s leaked admission of having lied about the economy to gain victory. The revelation triggered Budapest’s worst violence in 50 years, with Orban leading rallies to oust the premier.

Now, people are on the streets protesting against him, albeit on a much smaller scale.

“It’s remarkable for any politician to lose two elections and then return and win,” Kenneth Benoit, a professor at the London School of Economics, said in a phone interview. “It’s a testament to Orban’s charisma and his very loyal group of followers. It would be hard to imagine Fidesz without Orban.”

Since winning elections again in 2010, this time with more than two-thirds of the seats in the Hungarian Parliament, a majority unmatched in any EU country, Fidesz passed a new constitution effective Jan. 1.

Media Control

Orban asserted influence over the media by giving a commission whose members were all nominated by Fidesz the right to fine or shut outlets. He dismissed the top judge, the chief justice of the Supreme Court, and replaced an independent council monitoring the budget with one run by his allies.

“We have significant and well-founded concerns,” U.S. Secretary of State Hillary Clinton wrote in a Dec. 23 letter to Orban, according to the Nepszabadsag newspaper, which published the letter in Hungarian on Dec. 30. She called on Orban to protect individual liberties, Nepszabadsag said.

The overhaul was tantamount to a “regime change,” Orban told the Magyar Nemzet newspaper in a Dec. 24 interview. He refers to his measures as a “freedom fight” for economic sovereignty, blaming the previous government for swelling Hungary’s debt to the highest in eastern Europe.

The EU and the IMF suspended aid talks last month after the government pressed on with central bank legislation that enlarges the rate-setting monetary council and takes away Magyar Nemzeti Bank President Andras Simor’s right to name deputies.

Repeat Deal?

Orban last month said he rejected European Commission President Jose Barroso’s request to withdraw the law. Yesterday, Orban said he was open to negotiate “all points” as long as what he gets is “not political opinion but arguments.”

The EU is no stranger to Orban’s brinkmanship. He initially refused to amend the media law before agreeing in February last year to limit the regulator’s powers to censor “offensive” reporting and to ease registration requirement, meeting demands by EU Media Commissioner Neelie Kroes.

“Orban may think he can repeat something like that with the central bank law, compromising on some points without jeopardizing his goal of gaining influence over the central bank while securing the IMF loan,” Kai-Olaf Lang, a researcher at the Berlin-based German Institute for International and Security Affairs, said in a telephone interview.

The EU’s support for a Hungarian bailout is “critical,” Lagarde said yesterday.

Fitch Cut

Fitch Ratings became the last of the three main rating companies to cut Hungary to junk on Jan. 6, following Moody’s Investors Service and Standard & Poor’s.

It criticized Orban’s “unorthodox policies” of nationalizing $12 billion in private pension funds, levying extraordinary taxes on banks, energy, retail and telecommunication companies and forcing lenders to take losses on foreign currency mortgage loans.

The forint fell to a record against the euro last week and the cost to insure government bonds against default jumped to a record. While the country still has the power to set its own interest rates and print its own money, the government couldn’t meet its debt auction targets. Yields on the 10-year forint- denominated bonds soared to over 10 percent.

The currency, the world’s worst performer in the past six months, rose to a two-week high yesterday on optimism that Hungary would get the IMF loan. The country sold 44 billion forint ($181 million) of debt yesterday, 11 billion forint more than targeted, as the yield on the 2022 security fell to 9.38 percent from 9.7 percent at the last sale on Dec. 29.

No Default

“There’s no chance that Hungary will default,” said Viktor Szabo, who helps manage about $7 billion in emerging- market debt at Aberdeen Asset Management Plc in London. “The politicians understand how bad that is for a country’s reputation. Hungary will solve its problems eventually, although it won’t be easy and could take a long time.”

Hungary’s problems are “exaggerated,” Belaisch at Threadneedle said. “It’s a lot of smoke without such a large fire,” she said by telephone.

Orban originally shunned further IMF loans after assuming office, with his economy minister, Gyorgy Matolcsy, saying that turning to the Washington-based lender would be a “sign of weakness.” The previous government secured 20 billion euros ($25.4 billion) of international aid, underscoring Hungary’s position as the economic laggard in a region it once led.

Hungary turned to the IMF again in November as investors sold stocks, bonds and the currency. They were concerned the euro area’s crisis, which started in Greece more than two years ago, may infect weaker economies.

Battle Ahead

“We’ve won the first battle in our freedom fight but it’s not the last one,” Matolcsy told lawmakers on Nov. 21, listing the results of the cabinet’s “unorthodox” policies four days after asking for IMF help. “We also need growth, we need investment, we need competitiveness and we also need a new type of financial insurance” from the IMF.

The economic growth rate may fall to 0.5 percent this year, the slowest in the EU’s eastern states, according to a European Commission report on Nov. 10.

Public debt rose to 83 percent of gross domestic product at the end of the third quarter, the highest in the region. It compares with about half that ratio for neighboring Slovakia, which joined the euro in 2009.

Without extraordinary revenue, the budget deficit was more than double the government’s initial target in 2011 as a flat tax introduced last year cut income while failing to boost growth. Hungary didn’t take “effective action” to rein in its budget deficit as Orban’s measures weren’t of a “sustainable nature,” the European Commission said on Jan. 11.

Orban’s inability to master the economy until now threatens to spoil his plans of transforming Hungary in his image and may ultimately cost him the power he spared no effort at consolidating, university lecturer Lakner said.

“Orban has rewritten the rules completely in Hungary politically and economically,” Lakner said. “His trouble is that the economic engine won’t start. If he can’t operate the country, then it doesn’t matter if he has all the power.”

--Editors: Rodney Jefferson, Balazs Penz, Alan Crosby

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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