For Hungarians, the €20 billion of international aid to prop up their recession-bound economy is the price of a lost decade.
Meanwhile, neighboring Slovakia is preparing to adopt the euro on January 1, Poland is predicting economic growth as high as 3.5% next year and Czech unemployment is near a record low of 5%. “We’ve gone back 10 years and now Hungary is one of those vulnerable countries that can only stabilize their economies with outside help,” deputy chairman of the main opposition Fidesz party and former finance minister Mihály Varga told parliament as the deal was in the works.
More than four years after joining the European Union, Hungary was forced to secure loans from the European Union, the International Monetary Fund and the World Bank. The bailout came 10 years after Hungary told the IMF it needed no more loans and would repay the ones it had. In the past decade, Prime Ministers Viktor Orbán, Péter Medgyessy and Ferenc Gyurcsány let the budget deficit rise, reaching as high as 9.2% of gross domestic product, while government debt was 66% of GDP at the end of last year, according to Eurostat in Luxembourg. In the Czech Republic and Slovakia the ratio is under 30%.
Governments pumped money into local businesses, lavished homebuyers with state subsidies and boosted wages for public workers such as teachers, doctors and nurses. The increased spending put pressure on consumer prices, while eroding investor confidence in the government’s ability to rectify the budget shortfall. The central bank raised interest rates to 11.5%, the highest in the European Union.
Prime Minister Gyurcsány, who in 2006 admitted his government lied about the state of the economy, triggering riots in Budapest, said on October 15 the country was “under attack” as investors dumped Hungarian assets. To Hungarians, the bailout was another reminder of the country’s slide. “It’s incomprehensible that, as an EU member, we are turning to the IMF again,” said Tamás Graur, 42, who runs an internet services company in Budapest. “We haven’t even heard of the IMF for a long while and now they materialize out of nothing like a guardian angel.”
While no Iceland, whose currency slid so far in the financial crisis that it did not trade, Hungary has been ravaged. The forint was the world’s second-worst performer against the euro in the three months through to October, though the Polish zloty was the worst. The benchmark Budapest Stock Exchange BUX index, which includes OTP Bank Nyrt and refiner MOL Nyrt, lost 45% in the period. “This is depressing,” said Gábor Rainer, 32, a bank clerk in Budapest. “This means that we can spend the next 10 years paying back this loan again.”
The €20 billion in loans is the equivalent of €2000 for each of the 10 million population, or roughly four months of the net average wage. Hungarians’ worst humiliation was being grouped with eastern neighbor Ukraine, whose central bank governor said a default was likely if the country did not secure a promised $16.5 billion loan from the IMF.
“For Hungary, it’s really embarrassing because it has no longer been perceived as one of the emerging market countries and now it’s facing the reality,” said Michael Ganske, head of emerging-markets research in London for Commerzbank AG. Back in February 1998, the government decided not to renew an expiring standby loan, and then-prime minister Gyula Horn pledged to repay outstanding debt to the IMF of $160 million that year.
Leaders cut spending, devalued the forint and later slashed corporate taxes to stabilize the economy and lure foreign investment. Exports including Gedeon Richter Nyrt’s drugs, Suzuki cars and General Electric Co light bulbs boomed; the stock market was the world’s second-best performer in 1996. “We were doing so well before, looks like it’s our turn to go down,” said Adél Kertész, 58, a retired clothing trader. “When you are sick, of course you go to the doctor. Of course we are turning wherever we can. The most important thing now is to fix this. We can worry about the blame game later.” (Bloomberg)