IMF packing up Budapest office

The mandate of Iryna Ivaschenko, the IMF’s Resident Representative in Budapest, ends at the end of August and apparently ends for good, with the office operating opposite the central bank in downtown Budapest set to be closed.

“I am just initiating the closing down of the Fund’s Resident Representative Office,” central bank governor György Matolcsy announced in a letter sent to IMF managing director Christine Lagarde.

While expressing appreciation for the Fund’s support for the failing Hungarian economy of 2008, he stressed that the situation has changed, the Fidesz government’s policies and measures have been successful and as such, the IMF’s support, and consequently its presence, is no longer required.

“As a result of bold fiscal consolidation measures, implemented in parallel to a structural reform program in 2011-2012, the budget deficit was contained and, following a technical surplus in 2011, stabilized well below 3% of GDP in 2012,” the letter adds.

Back and forth

There was never any love lost between Viktor Orbán’s government and the IMF from the very start of the Fidesz cabinet’s term in 2010. Orbán prides himself for “kicking out” the Fund shortly after he took office. This lack of oversight is what allowed Hungary to introduce the numerous highly controversial taxes, like the crisis taxes on banks and other profitable industries that have since been extended and increased numerous times, much to the chagrin of the affected sectors.

The government rhetoric has always portrayed the IMF as a hostile foreign entity representing interests other than those of Hungarians, most prominently the banks, and that fending them off is part of the economic ‘freedom fight’ that has characterized Orbán’s policies.

How quickly things can change was clearly demonstrated at the end of 2011, when an impending downgrade to Hungary’s sovereign debt rating to junk genuinely carried the prospect of a default, compounded by the escalation of the eurozone crisis. While Matolcsy, economy minister at the time, told parliament in November that the government was actively “tuning its policies against the expectations of this three-letter organization”, shortly afterwards, the announcement came that Hungary is seeking a support program.

There were serious doubts from the start as to whether Orbán would submit to the rigorous terms that the IMF would expect in terms of economic policymaking and the government made little effort to allay these concerns. The very first informal meeting with representatives from the IMF and the European Commission collapsed late in 2011 when the government passed a widely criticized central bank bill while the delegations were in Budapest and had clearly told Orbán not to go through with the approval process.

The premier then announced that Hungary would be happy to get precautionary support from the IMF, but was perfectly fine without it. Once the holiday season was over, it became clear that market participants thought otherwise.

As soon as 2012 kicked off, the forint weakened to nearly 325 against the euro, government bond yields hit 11% and CDS, the insurance cost against default, went through the roof. What followed was quick backpedaling, and then a prolonged stage of negotiations.

However, any concessions the government made to the EU or the IMF weren’t ever fully in line with what was expected, whether it came to securing central bank independence or guaranteeing the autonomy of the judicial system.

There were also disturbances within the government. When Mihály Varga, at the time the chief negotiator, arrived for the IMF’s annual assembly in 2012 with the apparent assignment of hammering out a deal through informal channels, back in Budapest, the government launched a media campaign to express its defiance of the IMF’s demands, demands that never actually existed.

Peaceful waters

Orbán then got lucky, in that he received plenty of help from the international scene. The European Central Bank announced it would do everything in its power to keep the eurozone together and the U.S. Federal Reserve launched an extensive stimulus plan, along with other smaller favorable development that put investors’ mind at ease.

The global sentiment had a favorable effect on Hungarian assets that persists to this day. The forint has spent very little time above the 300 mark against the euro, the economy exited the technical recession of 2012 and bond yields have stabilized at manageable levels with steady demand, whether it’s the secondary market or the successful U.S. dollar issuance earlier this year.

The developments allowed the government to further urge the exit of the IMF through early repayment of the last of the loan that was approved in 2008.

Matolcsy applauded Lagarde’s leadership of the IMF and her focus on aiding shaken economies worldwide through promoting growth, and stressed that the National Bank of Hungary endorses a similar view. He also clearly expressed that he would prefer the Fund to continue with its efforts somewhere farther away.