Monday, March 30, 2009

Paradoxes of downgrading and simple accounting

One of the worst, most feared moments of the crisis for many ECE countries is the event of downgrading by a credit rating agency. It is usually accompanied by a sudden fall of the respective currency on the market (sometimes as a lasting effect, sometimes followed by a recovery soon), by the growing spreads of government bonds and by a wavering credibility in the country's public finances etc. Although it is far from being a case of normality, such downgradings and its opposites, upgradings occur regularly. The reactions, usually in line with the agnecy's direction, express the faith of the market actors in those institutions, the fact that they accept: the agency is capable to analyze possible outcomes of the present situation with mathematical models and judge whether a country among fixed circumstances can repay its debt or not. (In case of some factors they should rely on hypothesis or forecasts.)

The crisis shattered the credibility of such agencies as their mathmatical models readily accepted the fact that subprime mortgages can be "repacked" into extraordinarily secure assets and from the perspective of the crisis it was clearly not the case. However, this fact seemingly didn't affect their credibility as evaluators of sovereign debts (Paradox 1). (Who knows why? Incompetence remains incompetence even if it is used to assess a different type of loans and bonds...) But one can assume that rating agencies drew the consequences and they logical reaction is to be more cautious, that means to make downgradings easier and earlier. Not that in case of a crisis, when forecasts have to be revised in every month or week caution wouldn't be advisable, but acting instinctively is not in line with the perceived scientifically based approach. (Paradox 2) Anyway, the agencies are desperate not to make the same mistake, and in the future assess risks more precisely, what also means to be able to forecast problems (in case of countries: sovereign default) earlier. Downgrading is a sign of taking into account risks and warning the markets and the respective states. And if the worst happens notwithstanding the early notice, the credit rating agency can only gain in credibility and standing.

It is cerainly a sound approach in normal times, especially as markets can calm down after a downgrading, government should have time to prepare the necessary action. But there is a not easily dismissable possibility that in times of crisis the more severe judgment can turn out to be a self fulfilling prophecy in a way not strengthening, but weakening the much desired trust. The external factors, quite independently from the government action, can deteriorate in a very short time span once again forcing the agencies to downgrade a country's debt and leaving no time even to prepare the necessary measures as a reaction to the earlier one and portraying even the most able government as inapt. The deathly circle of downgrading and raising bond sperads leading to downgrading again and raising the bond spreads again can emerge too easily. As there is no way to know how a very alarmed and uncertain market will react, it is not easy to know when will this prophecy fulfill itself at the very moment of the downgrading. But if it would happen it won't be a sign of the wisdom and professional capability, quite the contrary. In this case, as it would be very similar to those derivatives from sub-prime mortgages, it would be inevitable to think that they once again missed their point, and miscalculated themselves. (Paradox 3)

But beyond some intriguing, rather theoretical considerations, sometimes the practical capacities of such institutions seems to be problematic as well. Today Standards and Poor downgraded Hungary's long term sovereign debt and issued a statement in which they calculated that the present 72-73% debt in ratio of GDP will reach a 82% level next year, after an estimated 6% contraction followed by a 1% in 2010 and after the country will be compelled to ask more loans from IMF. This is more or less in line with the ideas of "experts", but nothing else than a simple miscalulation, presuming that the present-day gross debt will eventually turn out to be a net one. But it is far from being certain, moreover, up to this point it didn't happened. The problem with this calculation - as the deputy general director of Hungary's national agency for sovereign debt explained in an interview last week - that although Hungary has drawn a substantial part of its IMF loan last year, it is now either a deposit in the Hungarian National Bank, or was lent to commercial banks with market conditions. In case of the latter there is a fair chance that it will be returned in time with due interests. The former either will be used to buy back outstanding state bonds or pay for bonds in due time, therefore not piling up additional sovereign debt, or simply paid back to the IMF without being used. As long as this is a reserve and not paid for running state costs or used up as a resource for pensions or similar expenses there is no reason to assume that it will raise the level of sovereign debt. But even if it would be the case the 82% ratio is highly unrealistic. The present debt is calculated by S&P as 73% of the GDP, and they estimate a 6% decline for this year and a 1% for the next. Together we can assume that they calculate the GDP level in 2010 as the 93% of 2008. Accordingly today's debt ratio would be compared with this lower level, yielding a 77,4% result as the level of sovereign debt. Even if they were not presuming any governemnt measure to control this years deficit (although it is not the case) 82% seems to be a bit exagerrated. But the problem is not this calculation, but the fact that the "experts" at S&P, although certainly very smart at making mathematical models, are not capable to make a simple accounting work. Well, I know that it is tought at another department...

Update: Two feloows from the National Agency for State Debt published today an analysis refuting the prevailing perception of the inevitable sovereign default, pointing out the huge mistake regarding the IMF loan. Unfortunately it is in Hungarian.

The black hole called Hungary - Notes on exceptionalism VI.

After more than a week of frantic selectionary work (vetting a lá Hongrois) a new candidate for the position of the prime minister emerged. The twists and turns of last week were certainly fascinating for observers and outsiders and I wouldn't even astonished to attend once a theater play or a movie using the story as a basis. (Conmedy or tragedy, I don't really know.) But as the sun rose to it's dull and boring daily road to be accomplished, the scene was taken over by our "experts" and "analysts" conveying the judgement of the markets on the events. Many of them was eagerly and happily sharing with us their wisdom and it is conceivable that they hadn't omitted the effect of the recent political events on the exchange rate of the forint. And once again their majority saw clear and undoubtable signs of a strong causal realtionship. The fall of the forint againts euro at dawn was a message, expressing negative expectations and so on. And once again the story was completely dead half an hour later. The zloty, tha Czech koruna similarly fell even at dawn.

Not only the incompetence of these guys, perceivedly having the necessary qualifications for and being entitled to make more money with the use of that of others is a sad picture but their whole construction of the world so nicely expressed by these small episodes. Even though the resignation of a prime minister, the deterioration of the process of finding a new candidate to a farce and a stalemate at the weekend, when the early elections seemed inevitable was not able to influence the markets, they are sticking to the idea that Hungary has its own significance. As the once land of promise in ECE and now the sick man of the region, the adhorring example to where incompetence could lead. Either as the best or as the worst in the region, but Hungary stands out. They are clearly not disturbed by the fact that this is not the case. Their beloved and adored markets are making not much difference and as long as the most important concern on those markets is whether to buy US bonds or not, it will remain so.

Friday, March 27, 2009

Today's world seen from Bratislava

The liberal daily from Bratislava, SME, published today an article on the political situation in Hungary.(Unfortunately it is not a longer piece, as its author, Peter Morvay is a colorful personality, for example he was for a while probably the last Czechoslovak citizen, more than a decade after the dissolutuon of that country.) Otherwise the article is a short one, outlining the possibilities and arguing that the decision of one of the candidates for being designated prime minister to reject the offer was reasonable, given the limitations of his role. Later Morvay poses the question whether the leader of the Hungarian opposition, almost certainly prime minister after the next elections, will be able to implement reforms, even if these will be contrary to his campaign promises, replicating the situation that destroyed Gyurcsány's credibility.

What is interesting in this piece is the perspective and the implcit lecturing Hungary on the lack of reforms, similar to the achievements of the Dzurinda governments. Hungary is portrayed as very sick country with an almost dead economy, while its neighbors are realtively safe from the effects of the crisis. Even though both statements are exaggerated (Romania's budget are in a worse shape, and its economyc funamntals are maybe even worse - the driving force of growth was a housing bubble, instead ofr exports as in Hungary or Slovakia, Slovakia's budget, although clearly unnoticed for Morvay, is in the process of collapse because of the tax system's faults, the exchange rate for the koruna by the introduction of the euro disadvantaged the Slovak industry very much and paradoxically this is perhaps only veiled by the crisis (!)*, not to speak of Ukraine, and recession is hardly evitable in every country in the region) my aim is not to make an argument. On the one hand, because the criticisim is not completely unfounded, on the other hand because the stance of the SME is more important for this blog. It shows how easy it is in ECE to accept the role of leader of the pack, that of the model country's and how easy it is to present one country as superior to the others, using achievements and the sufferings leading to them as proofs of this. Today's world seen from Bratislava is a very assimetrical one, instead of the crisis, and Slovakia is its rigid schoolmaster.

(Ok, let me provide some proofs: the economic sentiment index hit in March an all time low in Slovakia, construction, services, retail sales confidence in almost free fall and industry and consumer confidence showing deep depression and no increase even though the Slovak car making plants were positively affected by the German "Umweltpraemie".)

Welcome to the machine?

As I was reading the "letters to the editor" pages of the weekly "Magyar Narancs" today, some intriguing thoughts occurred to me, as part of a debate on an op-ed piece some week ago the author of the original article criticized his opponents approach to public services. He denied that the state run and regulated, obligatory systems, like the pensions, health care, social benefits etc can be perceived as similar to markets, expressing the balance of supply and demand. (Well, it is a bit vague but it is not my intention to write about the debate. The point is that the, let's say traditional, sociological, approach to state run public services and the economical one, confronted.)

Thursday, March 26, 2009

Chaos unleashed – Hungary in the Maelstrom

Four days after the announcement from premier Gyurcsány about his willingness to abdicate, the following events were very much in line with the predictable. The socialists are almost unanimously denounced as the roots of all evil; the first contemptous articles full of rage and triumphalism were published; the media is dominated by the expectations of the business elites regarding a prime minister convenient for their own interests, of course portrayed as the absolute public good; the president of the republic urged early elections; the socialists are in disarray, mainly only sticking to their positions and not to values or an ideology and we still don't know whether at least a new government will be installed or the dissolution of the parliament is inevitable. (Well, otherwise, everyday life seems not to be affected very much by the events. Hungary is a pessimistic country where passions are boiling under the surface but not outbursting at the moment.)

Conventional wisdom says that the fate of the Hungarian government was sealed by the crisis and the collapse was inevitable. Although there are many elements of the truth in this assumption I tend to disagree with its entirety. Not in the sense that the crisis wouldn't have had an impact on the events, quite the contrary. The decisive moment was the choice of the prime minister in the fall of last year to make an attempt to recover his credibility with effective handling of the crisis and at the same time snooker his opponent, Orbán, with the help of diverse social organization, from whom he hoped for support. He hoped for a reframing of the political discourse and legitimize not only his politics but the reform attempts as well. But the last decision, regarding Orbán, meant that instead of putting forward the structural problems of the world economy in the form of discussing the roots and possible outcomes of the crisis, the responsibility for the events etc. he returned to the earlier problems of Hungary and Hungary's economy, regardless any possible change in the external circumstances, because his would be allies were only interested in those problems. As a consequence, the discourse remained narrowly focused on Hungary as if it would be a sole entity, independent from the world economy, therefore capable to resolve its problems alone. Thus the presumption that the earlier economic policy was wrong and a decisive factor of the crisis, became an implicit axiom of every approach to the problem, that way not strengthening, but weakening the governments credibility, quite the contrary effect Gyurcsány wished for. Moreover the handling of the crisis became entangled with the problem of reforms. Those are not really popular and I suppose not only because of their effects on individual income and wealth. Similarly important is the fact that the vison and ideology behind them is very vague and clearly favoring only a minority of the society. Therefore without a profound debate, it is unrealistic to expect acceptance from those, who would be disadvantaged.

Maybe it is worth to make a short excursus regarding this problems, as it could highlight a very peculiar specificity of the current proposals in Hungary: almost every one of them is aimed to solve a particular problem in the system with a general transformation. For example the most popular version of a pensions reform among „experts” is the cutting of the present pensions with 8-10% and their freezing in real terms. Thus today's standard of living would be offered for today's pensioners forever in order to save money, while at the same time almost every one emphasizes that those are the burden on the system who get early pensions as handicapped with fraud. (The estimated number is well over 400-500000!) Another example is the general property tax, 0,5-1% of the value of the real estate according to the proposals. As the value of real estate expressed as multiple of personal income is very high, it could lead to a new burden not counterbalanced with the proposed tax cuts and especially in the case of pensioners and those with a minimal wage, whose income is tax free at the moment. Therfore they won't receive any easing, only a new tax, that easily could compel them to sell their houses. The main argument supporting this proposal is once again the fact, that many entrepreneurs exist, who pay taxes and excises after a minimal wage, while having a large and luxurious house. But once again instead of making a correction in order to eliminate the specific problems, the proposals are designed to achieve a profound transformation.* Returning to the problem of the crisis and reforms the above examples show one more important characteristic of the respective plans: those usually tend to redistribute the burden favoring the upper income categories and hitting the lower ones significantly and it is comprehensibly not really popular.

Once again putting forward reforms as the way of handling the crisis was clearly a mistake, as it enraged significant groups of the society and the result was indecision and ineptitude. Moreover, as Gyurcsány was hoping for support from those who's plans he was not able to implement, he was at the same time not in a position to attack them and spark a debate in which the responsibility of the rich for the future of Hungary would have been the most important topic. As a consequence came a deadlock, and Gyurcsány lost the remnants of his credibility.

One can argue that it was the only way, not only because those reforms are necessary (something I would like to discuss, even though not in extenso, later), but because the country is depending on the benevolence of the markets and they expect such moves in order to lower the country's risk assessment. I won't be that convinced, especially as the two problems, crisis and reform can be detached from each other. The crisis is a matter of how to pay back your outrunning debt at the moment (the real economy deopends on the recovery of the export markets, first of all Germany) and nobody (especially not the markets) expects the crisis lasting forever or for too long. (The former assumption is almost certainly true, the latter one is more dubious, but we can see every day how markets believe in the easy remedy in the form of some very smart and sophisticated action plan restoring the assets to their true value and they are waiting its arrival in any moment.) Therefore the foremost problem is not how to pay back your outrunning debt ten years later, when according to the expectations everything will be in order again (especially as nobody knows how much it will be, and with what conditions) and not how to pay it back at the moment when Hungary has a short-term credit from IMF, EU, World Bank, but how to pay it back at the very moment without accumulating a huge burden of new debts. If one simplify this problem it is quite clear: the government has to control the budget deficit in accordance with its most important creditors conditions (what are softening from day to day) and with the need to make some kind of stimulus as well. This is a hard task but not necessarily means measures aimed at long term objectives, rather ones that are effective but clearly only temporary. Like cutting the working week with one day in the public service, suspending, but not erasing the so called 13th month pension etc. I would suppose that the temporariness of the measures would make it easier to accept them, the measures itself would portray the government as capable to act decisively, while not necessarily meaning the renunciation on structural changes after the crisis is over.

On the other hand I would suppose that such an approach to the problem would be even advantageous for the quality of the structural changes as well. The most important problem with the present proposals is that those were developed in a completely different environment, when it was easy to assume that the model implemented in many ECE countries as an effective means of attracting FDI brings a fast real convergence and is capable to restrain the accumulation of imbalances. But with the crisis (and with the developments in the Baltics, even before the crisis hit those states) it is hard not to place a question mark after this presumption. Thus it would be deadly important to put two questions not independent from each other: how far are the earlier models valid (especially in ECE) and how will be the world economy emerging from the purgatory of the global crisis? As far as these are not answered convincingly no reform proposal (except some vague and very universal assumptions,like the need of balanced budget etc.) can be treated as well founded because those clearly wouldn't be based on the realities. (It does not necessarily mean that no reform proposal would turn out to be effective and succesful, but it would be rather the result of luck and not of the quality of them.)

If the latter approach would have been prevailed it would have had political advantages as well. Gyurcsány would have had an opportunity to take stance against the unpopular reform proposals arguing that the country needs a solid plan and not one based on dubious premises, to make populist attacks on the „capitalists” or the „bankers” and „brokers” as responsible for the crisis, seeking their own personal advantage even in these dire hours and therefore lifting some of the burden on him and maybe generate a popular rage against them, giving him real political weight after months of minority government when he was treated as doomed to lose his position sooner or later. Maybe he even would have been capable to implement some measures for the handling of the crisis that would have distributed the sacrifices a bit more evenly (for example with a one time levy on large properties, a nice, one time income for a shattered budget), thus making it easier for the majority of the population to accept the inevitable. It would have meant the renunciation on the snookering of his opponent, but maybe it would have been a real chance to reframe the discourse and transform the political situation in order to emerge with more popular support even for well thought changes. It was not a very probable outcome, but the possibility certainly existed. With the abdication he not only accepted his failure, but once again returned to his earlier strategy, waging war as the champion of reforms and modernity and almost certainly lost the real opportunity forever.

*(I know that there are many other supportive arguments for pension and tax reform. But as these reasons surface the most often, I only would like to highlight the twist in this approach, because it is a general problem regarding the different plans.)

Tuesday, March 24, 2009

Who will be the next in the line?

Today the Lower House of the Czech Parliament expressed its no confidence regarding the government of Mirek Topolánek. It is far from being certain that we will see an early election in this country as well, but even though his fall is not so tightly connected to the crisis as in the case of Latvia or Hungary, Topolánek is the third head of government in ECE having his cabinet collapsed in the beginning of the crisis.

It would be misleading to interpret the event as a result of the crisis in its entirety. Topolánek's government was a minority one (and the country's president, Vaclav Klaus, the predecessor of Topolánek in the chairmanship of the party nurtured a very visible enmity towards the prime minister), it relied on to renegade social democratic representatives from the beginning and his coalitional partners slowly dissolved themselves. At the moment the governemtn has only 96 MPs, the opposition 97 and 7 "independents" are the tip of the balance. Topolánek survived 4 (!) no confidence votes, partly because such a move needs 101 votes from 200 in the lower house to succeed. It was from the beginning typical petty politics, with money paid for votes, blackmailing but on the other hand very typical in the Czech political culture even in the interwar period. The pretext for another proposal for the opposition was a leaked video depicting one of the premiers aides trying to obstruct the airing of a TV program dealing with one of the renegade social democrats, who allegedly took thick governemnt funding for non-existent activities in the recent years. But I suppose that the eventual collapse of the government is also a result of the crisis making the existing rifts in the coalition more emphasized, especially as the prime minister's party gained popular support in the last three months, but solely at the expense of its partners. (Therefore the coalition as a whole fared not better against the opposition.)

This last point makes the action from the social democrats to bring down the government at this moment a bit hastened. Maybe Paroubek was worried about the narrowing of the gap between his party and the ODS (Party of Civic Democracy), but it was only justified because of the narrowing of his options regarding a possible coalition after an eventual election victory. Two months ago it was highly feasible that he will be able to form a minority or a coalition government with the support of one of the junior partners in the present coalition (the christian democrats or the greens), as his party fared at 44-45% of the votes, easily bringing more than 90 seats in the lower house. (Although this assumption sounds certainly a bit inconceivable for strangers to Czech politics, the christian democrats participated in the governemnts led by the social democrats between 1998 and 2006*, and once again the forming of coalitions with parties from very different parts of the political spectrum belongs to the traditions of Czech political culture as well.) Now he would be reliant on the communists, the outcasts of Czech politics, because they are not only legal but ideological sucessors of the Czech Communist Party. (But once again an illustrative event of the Czech politics, they played an important part in the re-election of their arch-enemy, Klaus as president). And maybe Topolánek will be secretly greatful for his opponents to take the burden of the handling of the crisis that is affecting the country more and more. It is certainly not a pure coincidence that Paroubek proposes to set up a government of experts until this fall instead of taking the responsibility.

But even if the collapse of this government is easy to be attributed to internal factors it highlits a very dangerous possibility: there is a not altogether slight chance for more and more political convulsion if the EU won't be able to stabilize the situation both in its core and at its periphery. Governemnts can fall one by one, social unrest can conquer the mind of the parliamentaries or the streets and spread towards the West. Even if the succesors of Topolánek or Gyurcsány will try to counter the crisis, the recipes offered at the moment won't be capable to calm down a gathering storm. What if the Polish government, having a populist opposition and president, will be compelled to admit that its budget is flawed and it will need harsh cuts? Unions in Romania are preparing demonstrations because of freezing the wages in the public sector. Ukraine is divided, its government is fighting with the president again and again while the economy's prospects are very dire. Bulgaria's unpopular government is facing a populist opposition as well. The EU elections will give an opportunity the unpoularity of the governments to be expressed, only to raise the pressure on the politicians. All those threats won't be relized necessarily but a domino effect is not the least probable scenario and a series of collapsing governments will once again, certainly in a strange way, call attention for the existence of ECE. Even if it is probable that almost every government in Europe will have to face very serious defeat in June.

(Actually the Czech Republic holds the rotating presidency of the EU for the first half of 2009 and the collapse of the government can be a serious blow to the community itself. But as the most important decisions regarding the crisis can be made by the large countries and the European Central Bank - that means the eurozone member states - it is not a real obstacle in the way of more determined action.)
*I should ask for my readers' forgiveness, as actually the first social democratic cabinet led by Milos Zeman was a minority government tolerated by Vaclav Klaus' ODS, the christian democrats were among the parties forcing Klaus to resign in 1997 and they only joined a coalition with the social democrats after the 2002 elections.

Monday, March 23, 2009

Doomsday reports? - notes on exceptionalism V.

Although I have my doubts regarding economic forecasts - especially in case of longer periods - and in these times it is hardly possible to make a prognosis valid even for a few weeks, today's newsreel contained two interesting pieces. The estimated growth of Germany was cut by many economic institues, while a London based research center published a series of prognosis regarding ECE, painting a dire picture of the regions outlooks. I won't discuss these analysis in detail, neither at this occasion nor later, but in this case it is not unnecessary to point out the most important elements, at least from an East-Central European perspective: Germany's recesion is forecasted in the 4-5% range, and as this country is the foremost export market of ECE countries (for example the correlation etween Hungary's and Germany's growth is extremly tight)and the strengthening of internal demand is not really possible due to the importance of the credit bubble in it's earlier drive, it is very likely that the region as a whole will be affected. Similarly important is the revision of growth estimates for the Czech Republic and Poland for this year. Up to this point these countries - with Slovakia - were considered as positive examples of prudent economic policies making them capable to weather the storm. (The specialist press here, in Hungary even now treats these countries as examples of very tiny positive growth in this year.) The forecasts for Slovakia were modified a couple of weeks ago (it has passed the Hungarian public's attention unobserved) and now the Czech central bank, having even in January a forecast of 2,9% growth changed it's view and now they are counting a -2%. The Londoners published a -3% forecast for Poland as well, a sharp reduction from earlier positive estimates and accompanied in this model with a 5% budget deficit as a ratio of GDP. Even though the perspective outlined for Hungary is worse (-7,5%) the whole picture depicts a catastrophic situation. (-15% and -10% in the Baltics, -5% in Bulgaria, -7,5% in Romania etc.and the revision for Hungary are now very modest compared to the estimates for other countries, not that it is very important.) The processes seem to be very similar and even if some differences will remain the direction is the same: no country will remain unaffected, and every one of them is heading towards a very dire ecnomic situation, regardless of earlier "good" or "bad" behaviour. It is highly feasible that at the end there won't be a defence line left on country level, no means to counterbalance the effects of the crisis.

Sunday, March 22, 2009

Knee deep in the mud - a resignation leading to nowhere?

The Hungarian prime minister announced yesterday that he is willing to give way to another cabinet with another premier heading it and as this blog admittedly has a bias towards Hungary I can't evade making my point regarding the events. At the moment, only a day after the announcement causing confusement, the outcome is very obscured, only one thing seems certain: there is hardly any short term possibility for Gyurcsány returning to his post. Although theoretically exists the chance that the parties won't find a person whom everyone accepts and that way at least the assumption Gyurcsány has no alternative as the head of government during the electoral cycle of the present parliament would be proven, but as he admitted that he is a liability of the handling of the crisis, it is hard to imagine that even in this case he can continue working.

Anything else lies obscured in the future, and even the motives of the premier are very uncertain for the public. Moreover, he left the country in a very precarious position, as he didn't present any coherent program for handling the crisis and the transitional period won't be really suitable to come up with one. This state of affairs is coherent with one possible interpretation of the move as well, that Gyurcsány intended to realize the program of the so-called Reform Alliance, but he had to face that he had lost the confidence of the businessmen and his party is not willing to support measures intended to spare on social spending and benefits in the magnitude it is proposed. With his will for resignation he gave away the only trump the socialists had, the fact that even a minority government was impossible to bring down with a no-confidence vote because no earlier agreement on the person of the next prime minister was possible to be achieved as a result of the very divergent views of the parties on necessary and opportune measures. After this move the socialists can either accept anybody the minor parties will impose on them and a program they are not sympathetic with and in exchange they can preserve some influence in the ministries, or move on and dissolve the parliament, fight an electoral campaign with a disoriented party, a highly unpopular party chairman and without any coherent program. The more because if this line of reasoning would be true it would be hard to imagine a socialist party putting forward a program very different from that despised one, presented by the Reform Alliance. In this case Gyurcsány is simply blackmailing his party because he is convinced that Hungary needs the same reforms in the middle of the crisis and as a solution for it, as it needed one year ago.

This last point is all the more important, because the reasoning and motives behind the surprise move are very well connected to this problem. Gyurcsány obviously lost his credibility in the eyes of the main protagonists of business interest, although his whole strategy was aimed at winning their alliance and support for his government in exchange for reforms and "reforms". In return he hoped for their support against his opponent, Viktor Orbán, whom he intended to depict - not without basis - as an irresponsible person, playing politics with populist promises even amidst a serious crisis. As Gyurcsány was not able to convince his hoped for allies of his ability to implement the promised measures, he became under attack from every side. (See my earlier post "A very Hungarian coup?") and he oscillated between refusal of the Reform Alliance's plans and not only acceptance but even declaring those measures insufficient.

For some weeks "political scientists" and "analysts" were flooding the media with an idea of a coalition consisting the socialists, their former junior partner, the liberals and the Hungarian Democratic Forum, a small rightist party, but clearly in conflict with the large opposition party, Fidesz, and envisaged this imaginary coalition having as a program the proposals of the Reform Alliance. (These are focused on lower, flat tax, cuts in social benefits, dismissal of 70000 state employees, irrealistic cuts in state expenses in order to reduce budget deficit under 3% of this years GDP and drive economic growth amidst the crisis.) Although the socialist party remained reluctant to this idea, it is possible retrospectively, that it was a test of the vision, initiated by the staff of the prime minister, who is obssessed with the idea that Orbán can return and destroy the constitutional system of the republic and that Hungary needs reforms either to make budget spending sustainable or focusing on competitivity. From this point of view, for the greater public interest, not only the Reform Alliance proposals can be justified, but a coalition in the above mentioned form as well.

But this is not the only possible motive behind the unexpected action. Gyurcsány really was not able to forge the minimal necessary consensus around a program for handling the crisis, and it clearly paralyzed the government, not acting decisively and with strong hands. There was a growing discontent among the ranks of the party as well, he lost support among intellectuals, the air was slowly dissipated from him. But the fact that this move was once again a surprise for his cabinet and his party, he didn't try to find a concerted solution not bringing the socialists into this trap, suggests that his personal conviction played a more important role than his concerns about the socialist's future.

In one sense, important even in the outcome of the recent events, Gyurcsány was a typical ECE politician. Even if he shared concerns about the division among ECE countries or between East and West, he accepted the idea of the everlasting competition for convergence, the role assigned to these countries in the EU economy and organization and tried to realize a policy according to these presumptions. Therefore, not seeing or accepting, that the crisis has common roots and underlying factors in ECE and no economic policy, however neo-liberal it was, was able to contain it, it was very easy to place every responsibility on him, as if his failed policies would have led to the crisis. Logically everyone was eager and unopposed in pointing out his resignation and the implementation of policies, being questioned in their usefullness at the very moment, as the simple solution for the crisis. In this sense Gyurcsány's fall was a consequence of the non-existence of ECE as a politically conscious region, as this fact is blocking the way of any proposal or plan seeking a new balance inside the EU and a systemic solution instead of the "every country is an individual case" approach so beloved by Europe's leader even today.

This fact is making the situation even more dire. One can expect triumphant "experts" and politicians rushing forward in the next few days (Lajos Bokros already proudly announced his willingness to accept a possible request), self-confidently speaking of their 100% certain solutions, in concordance with the already "proven" models of he Baltics or Slovakia, that means solutions aimed at the earlier state of affairs in the world economy. As Gyurcsány left no coherent program behind (although as party chairman he will be among those who will influence the proposalas of the incoming government) the talks and negotiations won't evolve around this basic program, highliting who is ready to accept an already formulated series of measures as a basis for a new cabinet or who can contest it's presumptions with real arguments, instead the parties will possibly seek a well known person acceptable for every one of them, with well known ideas and as not too much program for sale at the moment, it will almost certainly means one program with dubious moral basis (harsh measures for the poor and large tax cuts for the highest 5%) and dubious possible effects (it is hardly any chance that tax cuts will ignite any kind of aditional growth until Germany is in recesion, while it is quite possible that budget incomes will collapse). The socialists are clearly demoralized without the necessary intellectual background to counterbalance such ideas and the triumphant "experts" will simply give way their rage against the otherwise contepmtously seen party supposed to have been the main obstacle in the way leading to the complete reforming of the country according to they beloved Slovak model. In this process the socialists very likely will lose the remnants of their backbone, they will be relegated to the position of a herds of votes in the parliament and as the measures will not be too popular their popularity will crumble continously. And nobody, even our super self-confident "experts", can assure us that their recipe is the long term solution for our problems, especially as they are so self-puffed that it even didn't cross their mind that their models can be flawed in the light of the fact that every ECE country is in a very serious situation. (And an additional point: as the public will be fed by the search for the new premier in the coming weeks the discussion on the real problems will once again be avoided.)

Or the socialists can revolt, stick to their revulsion regarding the Reform Alliance's ideas (anyway, even a governemnt of experts needs someone to vote for their bills) and bring down the whole construction and march forward towards the early elections. But in order to have at least a slight chance they would need not the oscillating Gyurcsány, but the Hungarian bulldozer, their own Paroubek.

Thursday, March 19, 2009

Welcome, Poland! - notes on exceptionalism IV.

The polish prime minister announced this day that his country approached the IMF and negotiationg on "cooperation". According to the PAP press agency the premier stressed that the move was not to get a loan, instead to have "witnesses" that Poland is capable to withstand the actual storm. Poland is not in a similar situation as other countries in the region, do not need to beg for help - said Tusk, sticking to his earlier assessment of the situation, infamously expressed at the last EU summit when he was among those heads of governemnts who were denouncing the proposals of the Hungarian prime minister regarding a regional package. Tragic and ridiculous.

What makes ECE? I.

After many posts published on a very fluid phenomenon and concept, East-Central Europe maybe it is time to try to outline the specificities of the region, if it exist of course. The crisis is still lasting, forint is still haven't been dissociated from the region, Gyurcsány still hasn't got a coherent action plan for handling the crisis, while Estonia, Latvia and Romania - more precisely their political leaders - are sticking to financial institutions because of national pride and not out of rational calculation, the Slovak premier denounces Hungary as a country where neoliberals prevailed in the economic policy and caused problems not known in Slovakia, everything is normal in this very peculiar East-Central European way. As the crisis let some respiration, it is an opportunity to discuss more profound issues, the constitutive elements of a more or less coherent East-Central Europe from a histroical perspective and in the light of the crisis.

Although the term Eastern or East-Central Europe is widely used and accepted it is far from being a coherent concept. The idea is accompanied by a long story of debates and a series of historical analysis was carried out either in favor or against the idea. Once again a post on a weblog is not the appropriate method of presenting the problem, therefore I will confine myself to the basic facts. One way to define the region was relying on socio-economical factors - for example the emergence of the so-called "second serfdom" (Zweite Leibeigenschaft)in the 16th century, while in Western Europe it was gradually eliminated in its earlier from,; the dominance in agrarian production due to the so-called price revolution; as a consequence the region remained outside the initial zone of industrial revolution; its later development was characterized by the lack of capital formation, making the role of foreign capital outstanding (although in the last few decades this concept originally formulated by Alexander Gerschenkron became heavily contested). The idea of Europe's the three historical regions, developed by Jenő Szűcs tried to connect social formations and economic role and make the difference between West, East and a region between these two and maintained that the latter had the same position throughout the history.

Another approach defines the region as a latecomer in terms of economic development, or regarding for example the enlightement, the nation-building, or the cultural trends. The regoon'S products were almost always a reaction to outside pressure or challanges and were carried out with different results. As it necessarily led to a perspective dominanted by the West in almost every country westernizers and autochtonists emerged, pursuing different aims, but many times both were clothed as an adherence to the "Zeitgeist" represented by the West. Others conceptualize ECE as the zone of small nations and huge empires, a zone of mixing of people, cultures, confessions. For some the common history in the former Soviet bloc means a constituent element and one can mention the age old percepion of a transitory region between civilizations as well.

What is common in these approaches? (Bseides the fact that sometimes it is hard to make a difference between the outside world's unificatory view and real, significant similarities inside the region.) One can assume that the region historically, at least in the modern history, is charcterized by a peculiar position: these countries and regions existed in a paradox situation, they were central peripheries, geographically and sometimes economically vital regions for the existing states or emipres with few or no significant power. Their modernization took off either in economical or in social terms mainly from the middle of the 19. century, but it was a long process not to be completed in its entirety even today. The region's different entities faced the existence of borders inside, between "foreigners" and "authentic" population, making societies fragmaneted in many ways and the awareness of this fact seriously infleunced the political and social culture. The economic integration and development was a function of the events and processes in the center of the continental and world economy, the dependence of those vulnerable states on the export market provided by Germany (with the sole expception of Czechoslovakia) in the '30s resulted in their joining the Axis . After WWI new political realities came into existence but the old problems remained, never to be resolved even after 1945.

I would say, that the transformation process once again revealed the most important similarities. Lack of capital necessary to rebuild and transform the economy, to finance infrastructural development, the dependence on foreign investement and export markets and first and foremost the widespread poverty and the rising inequalities. Even though it is hard to imagine another way of fast and swifter transformation as it happened it was clearly far from being the perfect an universal solution of the huge amount of problems so many people hoped for. The region was not repositioned in the European and world economy (once again, I'm not convinced that it would have been possible), old patterns of integration returned even though this time not the agrarian sector became the dominant exporter but industrial ones. The European integration process had its benefits of course, and suprisingly or ironically its unintended consequences. Although the integration is far from being complete and it is even assymetrical (I mean not the temporary limitations imposed on the mobility of the workforce, but the assymetry in the EU instituions regarding intergarted marekts and economic policy and its institutions on the level of individual nation states, the lack of coherence between the fragmented social security systemes and the integrated labor market etc.)the financial sector with the liberalization of capital flows and the privatization of Eastern banks became so entangled and bound together, that there is seemingly no way to contain financial crisis at the frontiers of individual states or at the limits of the region. (Well, I would suppose it has another unintended consequnece, affecting the possible fiscal policies: with this integration the state is no more the sole and only or dominant channel of foreign capital inflows, therefore it has been weakened in its ability to influence current account deficit and to counterbalance international payments crisis with setting limits to conversion etc. as it happaned in the early thirties. It also means that the recipes used in the '90s, for example the so-called Bokros-package in Hungary could only have a limited effect today in this regard.)

This whole economic process was set in the context of a profound social transformation as well and the need and desire for a social convergence besides economic catch up. The idea of European integration spreading in the region as the most desirable aim, was encompassed by a concept of Europe and Europeanness heavily ladden with ideas of welfare, richness, social mobility etc. It made it easier to inspire individuals regarding the economic transformation, especially if it was presented with that profound nationalistic undertone referring to the eternal competition of states and nations in the region, but it brought about expectations resulting in policies later proved to be reckless. Not only in the well known form of Hungary's massive budget deficits at one point not only in electoral year, but in the form of easy credit leading to credit and housing bubbles and the idea of "nightwatch" state, left without effective means to intervene either in the economy or in the social processes. The former one tried to meet and match the expectations of the population through state spending, the latter one through state accentuated lending, and at the end both concepts led to an inept state in times of crisis.

Absolute and relative poverty, inequal development with "statistical miracles"* selling the dreams of fast catch up and leaving huge parts of the states' territory and population without the necessary means to participate in this process, up to this moment it was among of the results of the transformation. Maybe the dream of a fast and effective catch up is among the most important constitutive elements of present day ECE?

*With the phrase "statistical miracle" I mean the phenomenon, when a certain amount of investment in a very confined region of a relatively small country brings larger growth raising per capita statistical values significantly even in case when regional differences remain huge and sometimes even grow. This time not only the per capita statistical data distorts the picture, but the scale of the country. The same ammount of investment in a let's say twice as large country would bring only more moderate growth in per capita data, although the overall growth of output would be the same.

Our Hero, the bycicle repairman?

The Romanian premier proudly announced yesterday that during the negotiations with the IMF the government was capable to defend both the flat tax system and its level, because, as he put it: the loan has a preventiv character and therefore the Fund set no conditions for it. (???) The latter statement is a bit confusing as according to the prime minister 2/3 of the loan will raise the reserves of the national bank while 1/3 will be used for recapitalizing banks and restart the flow of credit in the economy. This seems very similar to the case of Hungary where a part of the loan was directed to the reserves of the cantral bank (optically it raised the rate of debt/GDP ratio although at the end it is not the necessary outcome, if it will be used for replacing outgoing debt or not used up just returned to the IMF, but market "analysts" are hardly aware of this fact, only some real economists were capable to do this simple accounting task) and the IMF set conditions for the Hungarian government as well, although not specific, rather general ones. MMoreover, the IMF seems to be very "flexible" these days regarding the individual measures, for example in the Baltics they presented their proposals for Latvia, but yielded to the Latvians pressure and accepted that the country is not ready to give up the currency peg. I suppose this was the case here as well, the IMF delegation presented an overview of the situation prepared by their staff (according to the Cotidianul the IMF forecasted 4% contraction and 4,7% budget deficit) and suggested some measures. The Romanian governemnt defended the pride of the Romanian economy, the flat tax system and the low tax rates - at least in public - vehemently and prevailed.

It is quite probable that the IMF was not sticking to their own ideas as they accepted proposals of governments in other countries as well and even they are forced to accept the rapidly changing realities in ECE, making the reaching of the goals of the IMF sometimes illusory. Romania simply repeated the tactics of some Baltic states, its politicians fought for something easy to achieve to make the bitter pill a bit sweeter, and preserve national pride. We don't know of course how proud ordinary Romanians are of their tax system, but politicians are clearly obbsessed with the idea that: a, they are, b, this tax system is the primary source of the growth of the recent years.

Maybe they are right, although I would be a bit suspicious. But the real question is what kind of measures were offered and accepted by the Romanian government to comply with the conditions of the IMF, if they are not ready to raise budget revenues even if the income of the state houshold is collapsing in the recent months? (The chairman of the social democrats, the coalitional partner of Emil Boc's PDL attacked yesterday the IMF agreement and offered instead a relaxation of the budget deficit from 2% of the GDP, implicitly suggesting that the governemnt accepted keeping this rate as a goal of the agreement, leaving not much room for easing. But once again a caveat is in order. As Boc can present a success to the public it is possible that Geoana simply wants to have his own one and fights for a larger budget deficit after it was already agreed by the IMF.) The logical solution is budget cuts, but it is a problematic issue, as we could have seen in the case of Latvia as well. Unions are preparing for demonstrations even because of the cuts in the present budget that became obsolete in one month (it was accepted in February) and with further painful measures they will be even more eager to act. The coalition is not united regarding the necessity of the loan and it is another political risk. As for the economic problems, in Romania the export oriented sectors has much lower share in the GDP than in Hungary, Slovakia or in the Czech Republic and the country's growth was driven by a real estate bubble based on credit fuelled by transfers from abroad. (According to different estimates 1,5 -4 million Romanians are working abroad, mainly in country seriously affected by the crisis, like Spain, Italy.) It was similar to the Baltic case and signs of overheating were clear, therefore the task would be not only to manage the crisis but to direct the economy on another track. The government at the moment tries to launch great construction projects based on the better absorbtion of EU funds (the plans are 10bn euros for this year!) and to relaunch stalled housing projects. The proposal is simple, but doubious: local self-governments will buy those stalled projects and finish them.

It is not sure that another path, the raising of revenues would be succesfull as well. It clearly won't be benefitial for demand, although it hardly would be the main reason for the real estate market to be frozen. As the workers abroad will be affected by the crisis it will dissipate the basis of credits and consumption and it is hard to imagine the government pump enough money to the economy to substitute 7-9bn euros a year. But the real danger could be the financing of the deficit. Romanias credit ratings are in the "speculative range" and the main reason the country was not affected by this fact earlier was the massive transfer of income from abroad and the optimism about the countries future. But it is hardly a way to follow in the coming years and the government in an effort to defend higher income form higher taxation can deprive itself from budget revenues even after the crisis is over.

Tuesday, March 17, 2009

Look, the rabbit wears no hat! - notes on exceptionalism III

For years Hungary was treated as the sick man of ECE, a country in wich the necessary political courage for thorough reforms, following the models of Slovakia, Romania, late Poland or the Czech republic do not exist. The result was - at least for the critiques - evidently the weak economic performance and they usually tried to drive the country's elite to refomrs pointing out the perceived successes Slovakia. Even in the Slovak public opinion prevailed the view that their country is the new model for economic reforms while Hungary is nothing else than the horrific example for the results of recklessness and fear from the publics reaction for hardships due to the necessary changes. This assumption was so widespread that it is almost exclusively accepted by analysts, economists etc.

But the ideas of exceptionalism and national pride was able to twist even this very simple and straightforward view in the case of Robert Fico, Slovakia's prime minister. Fico, how is allegedly a leftist politician governs in a coaltion with the former premier Vladimir Meciar, a populist and autocratic politician and Jan Slota and his extrem nationalist Slovak National Party. Slota'S favourite passion is making invectives against Hungary and Hungarians in Slovakia. Fico himself is not free form such emotions and he has rightful share in the deterioration of the relatioship of the countries as well.

This time Fico simply turned upside down the typical assessment of the economic performance of the two countries (more precisely the factors behind them) when he, while attending a conference organized by the Slovak foreign ministry, attacked the allegedly neoliberal politics of his predecessors and as examples for the afilure of neoliberalism he used not only the Baltic states or Ireland, but even Hungary. "Look, very attentively, how the teachers of our predecessors, in Ireland have fallen, or how who admired together the neoliberal economic practices, in the Baltic states or in Hungary have fallen. It is not a coincidence that these countries have a significantly worse situation than Slovakia." (Well, Fico's populism was clear from the following remarks epxressing his opinion that the crisis, even if he is not adherent of conspiarcy theories, offers an extraordinary possibility for redistribution of wealth, as it happened in the privatisation process of the '90's, but it is not tightly connected to this post.) Anyway, as we can see, Hungary has no chance to escape its fate and being treated as the source and exapmle of all sins. The country is denounced eithr as too reluctant, its elite too coward, or too neoliberal. Ironically, Hungarian politicians and intellectuals very eagerly use Slovakia as an example of outstanding reforms to follow. Our country became similar to the rabbit in the joke, who after fulfilling every demand of the to villains, the fox and the wolf, was beaten up becasue he wore no hat.

Sunday, March 15, 2009

Shame, fear and pride - notes on exceptionalism II.

The story of IMF loan for Romania rolls on slowly, it is business as usual. The former premier and leader of the opposition National Liberal Party (PNL) attacked the government as faint-hearted people, who will cause a recession with the IMF loan. More precisely with the conditions imposed by the Monetary Fund. Although it is rather a political manoeuver (this year is an electoral one, and Mr. Tariceanu seeks the president's office for himself, although there is a quite difficult path lying in front of him with a popular President in the race), it is maybe effective but not a very sophisticated one. Anyway recession seems inevitable and it is comfortable to find the responsibles in advance. More interetsting is a passage left out from the english version of the news, once again stating that the EU would be ready to act in favor of Romania without the IMF and the last part of the sentence stresses, that the IMF has nothing to do with EU members, as this orgainisation is well known to assist only countries of the third world. Once again national pride prevailing over rational argumentation.
Not that he would be alone with such line of resonong, the prime minsiter and his government is supposedly under pressure from the IMF to raise taxes or abandon the flat-tax system. Theodor Stolojan, a former prime minister and a jolly joker of the Romanian politics never to be used (it is an interesting story but it has nothing to do with the crisis) announced that the flat-tax can be maintened only in case of a widening of the basis of the taxation. But his assessment of the situation was a bit too dependent on if-s and when-s... Anyway, Emil Boc, the head of government immediately take the posture of the heroic defender of the flat tax (there is a shorter English version again..), using the typical argumenttation (so popular in the Baltics regarding the currency peg), that it is an issue of national honor... Although I'm not really convinced that his assertion regarding the falt tax - it was the main driving force of growth in the years preceding the crisis - are true, but at least comprehensible. But treating it as a problem of national pride and accepting unconditionally that the same will be true after the crisis seems a bit unaware, at least for me. (Not to speak of the fact, that in a country where only 0,79 person contribute to the pension of 1 pensioner it is hard to imagine long term political sustainability of a tax system not yielidng benefits for the bulk of the electorate. It can be irresponsible from the perspective of economists, but democracy tends to work this way...)
Once again I'm hardly in a position to decide whether currency peg or flat tax is advantegeous in real terms or at least it has important psychological effects contributing to investment decisions, for example. I even wouldn't dare to say that it is not comprehensible emotionally that in some of the ECE countries such notions and concepts exist. But this kind of argumentation is not leading anywhere in the middle term and sticking to institutions becoming obsolete, only because of some kind of national pride, is a dangerous development, even though it can be understand from a different perspective.

Update 1: Here is a nice collection of the different opinions and reasonings, unfortunately in Romanian...

Friday, March 13, 2009

The Roaring Mouse*

The Hungarian minsiter of defense, visiting the USA demonstrated that he is a good son of the Hungarian nation and proficient in ECE politics. According to the news he reprimanded Barack Obama because of his remark on Hungary's and Ukraine's problems. As Obama and Gordon Brown met simoultaneously with our very Hungarian coup, in Hungary nobody cared about the real text, and the very benevolent sentence, not sepcifically aimed at any country, was interpreted as the sign of anxiety and discontent in the White House especially because of Hungary. (For many it also was a signal that the White House abandoned Gyurcsány, as if it would be a significant problem for the present adminsitration among the present circumstances who is the head of the Hungarian government...) Obviously, Mr. Szekeres was not among those few who took the burden and read the original text, nor was his staff capable to do it. Instead, he joined those who misinterpreted the remark and took the role of the nations defender against unfounded allegations. Moeover, just to reveal that he is a true ECE politician he expressed his affrontement because Ukraine was mentioned together with Hungary, although - contrary to Ukraine - the fundaments of the Hungarian economy are good. As if I were hearing Topolánek or Tusk two weeks ago...

*I knew that the novel and the movie has a different title, but as I admire Peter Sellers I felt that it would have been an insult to his memory to make him equal with Mr. Szekers, even if only indirectly...

Thursday, March 12, 2009

Reflections on flat-tax

The flat-tax, paired with the low redistribution rate is considered to be the key of economic success, so-called miracles in many ECE countries. The Baltic states, Slovakia, Bulgaria, Romania used to be mentioned as obviuous examples. In Hungary, where a one-sided dabete on the problem ensues (economists and "economists", "experts" strongly argues in favor if its introduction, while the socialist party obstructs it, although without the necessary intellectual capacity) these countries are often used as textbook examples of fast growth that substituted the budget revenues lost with the abandonment of differentiated taxation and it is often percived as well, that these countries have, due to their tight fiscal policy, room for manoeuver in this crisis. To put it simply: they have the necessary reserves to loosen their budgets and stimulate consumption either with financial transfers or with invesments.

The present crisis offeres proofs for a very different interpretation as well. According to the latest news I would dare to say, that at least in ECE this mixture of tax-system and fiscal policy led to an ironically pro-cyclical model instead of the perceived anti-cyclical one. Let's collect some data and facts:

a, the Romanian budget collapsed in the last two months of 2009 due to the loss in VAT (the figure of budget deficit as ratio of the GDP dubbled in this period)and the revenues were well under the expectations in the first two months of 2009 as well

b, Latvia is struggling to controll its budget, the 5% deficit agreed with the IMF in last year seems at the moment highly impossible, even a reduction to 7% would need drastic cuts, for example 20% of wages in the public sector

c, Estonia - a country that run budget surplus for years and having large reserves - needs cuts (!) of budget expenses in order to achieve its goal, a 3% deficit in this year, not really allowing the governemnt to take stimulating measures

d, the most striking of all: Slovakia's budget revenues are lagging behind last years figures with 15% (the figure is even worse compared to this year's budget, as that was calculated with a 2,9% GDP growth) and the revenues from VAT are almost 50% lower than in the previous year.

Obviously, there is no room for fiscal easing and stimulus, these countries rather needs harsh budget cuts (or tax hikes) in order to control their state houshold, what is quite the contrary to the proposals of an anti-cyclical policy, even if the flat-tax system was treated as an important factor of the impregnability of these economies.

Once again I have to admit that I'm not an economist, therefore my forthcoming observations are rather hypotetical, a kind of brainstorming, but I hope that not completely without substance. The main question is what caused this unexpected turn of events?

The above mentioned tax systems were made attractive with a relatively low flat-rate, between 10% (Bulgaria) and 24% (Estonia), mainly around 20%. Usually it was achieved with the abandonement of a progressive tax system with high rates for higher income. The restructuring also meant transfer of the focus of taxation to the consumption, especially as the effective lowering of taxes for individuals were meant as means to drive it. As the budget revenues reached their former level usually soon after the introduction of the new systems it was considered as a success. (Fiscal reserves were built by cutting expenses.)

Therefore it is not surprising that with the decline of personal consumption budget revenues are declining as well. But I would dare to say that situation is worsened by two factors, a general one and a specifically East-Central European. We can presume that wages are - at least in Europe - less flexible than consumption even in times of crisis, therefore taxation on income is more predisposed to withstand sudden changes and yield relatively more revenues than based on consumption. (Well on the long run changes are maybe the same, but we are struggling for months of survival until our export markets can restore their demand.) That could mean that taxation systems based on income has more reserves on a shorter horizon, giving a chance for stimulation. (Well, of course only in case of a relaxed state household.)

More interesting is the specifically Eastern-European phenomenon, the possible importance of the credit bubble for the states themselves. Although it sounds very nice that net wages were raised by 10-20-30% due to the new tax systems, as a source of consumption in an area of free trade like the EU it meant less than one would have expected. Avarage gross wages were between 500-800 EUR (630-100 USD) two or three years ago, now they are somewhere between the 600-1000 EUR range. With a very basic calculation we can assume that lowering the tax rate with 10% meant 50-80 EUR in a month, not a very substantial sum, I would dare to say, especially if someone was eager to buy more expensive goods and not only extend food consumption. This sum in itself was not really able to incite a consumption frenzy, but if it was multiplied by credit ... 100 EUR is the monthly payment for a decent sum. Add the effects of the housing bubble to it (mortgage based consumption credit meant in Hungary only a two thirds monthly payment compared to normal consumption credit, inflating the bubble considerably) and it is a very dire picture. I would conclude that the credit boom were necessary to stimulate consumption and through consumption raise budget revenues. It is possible that without this source of income states would have been forced to cut further public services and that way incite public discontent...

Anyhow, if my hypothesis has some basis, the collapse of budget income is more comprehendible. Consumers are saving money, as it is common in times of crisis, banks are not lending money as it is one of the main factors behind the crisis and even if workers are not laid off, the wages are taxed so moderately, that it won't bring too much for the state. Governments suddenly has to cut budget expenses instead of an expansion.

(There could be a counter-argument, that the effective tax-rate in Hungary, calculated as a ratio of the sum of the officially paid wages, is not higher than in these countries - at about20%. But there is at least one significant difference, as the minimal wage is taxed with a very low rate (2-3%) that means a significantly higher rate even in case of average wages. Those, who have higher salaries, and therefore arguably have a better position in their companies, not to be laid off so easily, pay the bulk of personal income taxes, while those with minimal wages are paying minimal taxes, therfore if they lose their jobs - and one can assume that they are laid off in the first phases as they are easily replacable - it is not a loss for the state houshold, even though a burden in the form of unemployment benefits. This tax system is not making individuals cheerful, but it could have suprising - well, relative - advantages.)

Shame, fear and pride - notes on exceptionalism

The Romanian president, Traian Băsescu was very active this week, adressing the parliament with a speech on the state of Romania. (Although it was an event similar to the usual State of the Nation Adress, as Băsescu's prerogatives are very limited it was rather an act of substituting the premier, Emil Boc. It is quite interesting, how the president is acting as a substitute of the prime minister, the resons behind it, but not the story I would like to deal with here.) After one or two months of contradicting scraps of news, statements on the necessity of an eventual crdit from the IMF the president announced that Romania will receive support from the international financial institutions and the EU. In hard times it is far from being surprising and perhaps as an action to contain the spreding consequences of the crisis a wise one, or at least an inevitable one. But the long story of the credit once again reveals the importance of national pride, the will of being differentiated from "others", from neighbors considered as traditional enemies.

As it is well known, two of Romania's neighbours, Hungary and Ukraine have a running agreement with the IMF, those countries are receiving financial support in the form of credit. Although Romania was considered for a while as a possible next to the line of countries applying for IMF credit it was a very delicate issue in the country. Politicians, the governor of the Romanian National Bank were either denying any overture towards the Monetary Fund or downplayed it as a condition of the EU for its own support program. There were many contradicting announcments, even Băsescu was oscillating between denial of the necessity and the acceptance of compulsion. He once even spoke of the necessity to consult the people on the IMF loan. (As if it would be time enough to make such consultations in case of necessity.) Others were spreading fairy tales that the EU has no such condition (a member of the European parliament even told the press that the EU Commission is prohibiting Romania from an agreement with IMF!) and used the opportunity for attacking the government. Quite peculiarly the chairman of the coalitional partner of Băsescu's PDL, the social democrats, is opposing the idea even at the moment, arguing that Romania needs an own "anti-crisis plan". (The government, in wich Mircea Geoana's social democrats are sitting announced its budget in February as a complete anti-crisi plan...)

Although I personally have no real emotions over IMF loans and similar agreements, even if I'm not quite convinced of the usefulness of their recipes for the respective economies, such feelings are not completely incomprehensible. But in this case the reluctance is rather a sign of the traditional enmities than the expression of real ideological convictions. (The social democrats were so eager to be a governing party that they abandoned almost every points of their election program, even those that would be advantageous for the state budget and in line with the traditional leftist perception of social justice, like the progressive tax-system.) The relationship between Ukraine and Romania is far from being relaxed, a territorial dispute was settled by the International Court in The Hague, Băsescu mentioned some territorial reorganizations in favor of Moldavia and at the expense of Ukraine and the Ukrainian nationalism, having a strong official support in the last months caused problems for the Romanian minority in Northern Bukovina. The other neighbor, Hungary is one of the traditional "others" in the Romanian identity, an arch-rival. The ever graver political chaos and the steep economic contraction in the Ukraine and the very slow economic growth in Hungary in the last few years - while Romania was treated as a new economic miracle - certainly accentuated the self-esteem of Romanian politicians. It became even more emphasized when at the end of last year the IMF and the EU considered Romania as one of the few countries predicted to have growth in 2009. Against this background the necessity to ask for an IMF loan - and to admit, that Romania has to face a grave economic situation, first of all contraction, certainly was a shock for many politicians. The IMF loan is not only the loss of sovereignty (one of the most important elements in the consciousness of the Romanian political elite in the 20th century) but the loss of the favourable position compared to the arch-rivals - the missing of the chance of overtaking them. (Although regarding Hungary it was rather illusory in the short term even one year ago.) In this sense the crisis relegates Romania to its earlier position, threatens to lose its newly acquired "Wunderkind" status and to eliminate the perceived and precious differences between the country and ECE. The fact, that it is treated as a catastrophic result clearly shows the stance of the Romanian elite towards the idea of ECE. (Băsescu promised in his speech not only a fast recovery, but the chance to get loose from the region in case of hard work.)

In Slovakia, before the gravity of the economic situation and the budget deficit was revealed, the leading newspaper, the liberal (in European sense) SME publsihd sarcastic commentaries on Hungary's premier and economic situation, while at the same time pointing out the hypocrisy of Robert Fico, the Slovak prime minister. Th surprising fact was not the negative opinion on Gyurcsány, but the scornful tone indicating a self-assured belief in the superiority in the Slovak economic reforms. Those were implied not as a possible and contradictory way of managing problems, but as the only, and self-evidently superior model, something to be followed obligatorily and at the same time conveying supriority to those who are pioneers of its case.

What about Hungary? Well, this country obviously does not belong to the region. The ridiculous story of the forint coming lose of the other ECE currencies continued to be spread, it was even mentioned as reality in the press at Wednesday. I'm not an ardent lover of the idea of national characteristic but there are obviously some people who are not happy without having the feeling that they are living in a doomed country. Moreover, the "analysts" of Raiffeisen Bank Hungary took it granted in their analysis published this week. I would say, that the usual distortion of time was somewhat reversed, and not complete history created based on ten or fifteen minutes, but ten minutes streched into a week or more, maybe into eternity. We are now living forever in that ten minutes last Wednesday....

Saturday, March 7, 2009

A very Hungarian coup?

Personally I'm not adherent of conspiracy theories, especially as they were extensively used in the 20th century to adress very complex social processes in a very simplified way. The results are well known, unfortunately and fortunately. But as historian I have to admit that conspiracies exist.

Maybe we have witnessed one this week in Hungary? A series of events following each other and pointing to the same object raises the question even for me. What exactly happened? The trigger was the EU summit last weekend, obviously not bringing any immediate relief for the countries in ECE. Some suspicion would have been justified at that very moment, as those politicians eagerly seeking the ground for a common standpoint during the preparatory phase of the summit, surprisingly declared that there is no need to treat the region as a whole. The German press next day fired a salvo on Gyurcsány Ferenc, praising the wise politics of the German chancellor and describing the events as a complete failure and serious setback for her Hungarian colleague, whose every proposal were rejected. Although more nuanced opinions existed (check the link in the psotscript of my previous post), this point of view soon became dominant in the Hungarian press and Gyurcsány was portrayed as a ballast, an outcast of Europe. Political analysts, economic "experts" suggested in a barely veiled way that he was a burden.

After two days of hammering, on Wednesday came a sudden event - a declaration of supervisory authorities from ECE about the unjust opinions on the vulnerability of the banking system of those countries, once again emphasizing the differences between the individual cases, signed by five authorities, the Hungarian one lacking. Either because of this event, or only simply as a parallel process, the excahnge rate of the forint against the euro suddenly fell to a new lowest ever level. This was immediately presented in the media as the edge of the abyss, the begining of the inevitable, because, as the titles were phrased, the forint was dissociated from the region, the markets gave right to those, who declared that Hungary has its own poblems, not to be compared to and bound together with the other ECE countries, with more sound fundamentals. Next day even the largest and most prestigeous daily newspaper appeared with an article on its cover bearing the title: "The markets want reforms, the stock exchange and the forint 'came lose' from the region, The chair of the MDF [Hungarian Democratic Forum, centre-right party] proposes extraordinary parliamentary session" (The online edition titled an article on the previos day as "How important is the Gyurcsány-factor in the thrashing of the forint?".) Once again experts argued on behalf of an abdication of Gyurcsány, new informations (?) surfaced - from informators unwilling to disclose their names - about a pathetic preformance of the prime minister in London at Tuesday, where he discussed the government's proposals and the story of dissociation continued even on Friday. That day Sándor Csányi, the boss of Hungary's largest bank, OTP mentioned the early elections as a possible solution. (Later he disclaimed it, alleging that it was only one of his aides.)

Up to this point it is an ordinary story of incompetence and wishful thinking, as I will point it out later. But rumours were spread in the country since Wednesday as well, aimed to destabilize the financial system with a rush of clients for their savings. One of my friends was called from Geneva (!) just to be asked whether it is realistic that OTP will freeze savings accounts that day, another friend of mine was told that Gyurcsány would announce sovereign default in minutes. This latter piece of gossip was circulated even at Friday. On Friday the National Bank and the supervisory authority was forced to issue a declaration about the stable foundation of the banks in Hungary and the guarantees backing clients savings. The simultaneity of these events are not the only possible argument on behalf of a conspiracy theory. The story of disscotiation was clearly an invested one, without any real basis even on Wednesday, not to speak of Thursday or Friday, as it could have been clear for anyone checking the real time currency rate charts at any suitable website. The curve, showing the change in the exchange rate of Forint, Zloty and Czech koruna was almost identical on Wednesday, Thursday or Friday, the curve of the forint only moved upwards regarding the y-axis. It happened almost at once, only lasted for ten or twenty minutes, not longer, and from that point point the changes correlated with the changes in the rates of Zloty or Czech koruna. I'm not a well-paid broker, but it was quite clear even for my mediocre eyes.* (The story was changed a bit, as it was clearly not true. At the moment the dissociation is interpreted that forint stays at a historic low against euro, while the other two currencies - although moving simultaneously and parallel - not. But, pardoxically, it is not a supportive but a counterargument. As those currencies were considerably far from their historical low even at Wednesday, if they would have been attained this level since then, it would have meant a very different movement from that of the forint.)

One can of course believe or reject that a conspiracy to overthrow the government was underway last week and it is far from being proved by the facts I gathered here. I'm not sure either, although the density of the events seems to be a bit more than simple coincidents. And even though I have a terrible opinion on so-called "experts" and "analysts" in Hungary, and I would be glad to have proven that they are so stupid guys as not being able to interpret two charts besides each other, but the concerted efforts to create a panic, a sudden fall in the rate of the forint and the effort to portray it as a result of Gyurcsány's incompetence and status as the least accepted politician by his colleauges in Europe also can be explained as something deliberate as well.

I don't know what could have been the aim of such a move, who could have been behind such an action. Maybe it was just someone trying to take adavntage of surpise events. Maybe not only. (I advise everybody who would rather rely on facts not to move beyond this point, as the following are simple speculations, funny games of mind.) Passionate haters of the opposition leader, Viktor Orbán can create a narrative interpreting the events as his attamept to return to power. He met with every key foreign actor of the story before the EU summit (Merkel, Donald Tusk, who, although convoking a mini-summit of ECE leaders, at the EU event simply rejeted the idea of the necessity of a common approach, and Mirek Topolának, Czech premier and current president of the EU Council, who was another ECE politician arguing against the common treatment.) Orbán certainly has close connections to the Hungarian economic elite, who are willing to accept his political strategy: not to disclose any specific measure before he can achieve an electoral victory from fear of alienating the electorate. They clearly think that although Orbán won't campaign with the necessity of asuterity measures, rather with populist promises, he will realize their program, put forward as the so-called "Reformszövetség" (Reform Alliance) agenda. Orbán scheduled his usual "State of the Nation Adress" to this Friday and it was unusally uninteresting and without content, as if he would have been preparing for another situation, the announcement of victory over the enemy and his own return as the saviour. But there is the possibility of an attempted coup inside the ranks of the Socialist Party in the hope that with this debacle Gyurcsány can be eliminated not only from the government, but from the party itself. I suppose that the worst fear of many socialists is the possibility that the present premier could retain his position of party chairman even after the looming electoral defeat. And another possibility is an action organized by the economic elite to push forward their program, in many points opposed by the government and force the prime minister to accept it, instead of another. As their proposed measures would be very advantageous for the larger companies and those with the highest income in the country, while putting the burden on those with the lowest income it is an eminent material interest of theirs not to allow to implement other measures. As the prime minister at Friday announced that he would even like to propose more profound changes than the "Reformszövetség", maybe he was impressed by the events... (Although without any specific measure it could even mean cahnges to the contrary direction...)

Two more observtions on this topic. Firstly, it is far from being certain that we have seen a conspiratory action, but if it would be true it is extremely irresponsible, as the tactics was to bring the country to the edge of default, where it is far from being sure that the worst can be impeded. Secondly, there is many legitimate reason to argue in favor of Gyurcsány's resignation, especially as he is far fom having a clear and coherent concept about the necessary steps, he is not able to separate the handling of the crisis (contorlling the budget deficit at any cost, with ad hoc measures) and the setting of a new direction for the country, not regardless of the experiences and conclusions of the crisis, that way sometimes just allowing the confusion and insecurity to grow. But if the most prestigeous newspaper would like to side with those, who calls for this move from Gyurcsány it would be more honest and maybe even more effective to write and publish an article with a cover title" "Gyurcsány has to take his hat" and not to mingle with dubious actions with dubious means threatening to move the country towards the catastrophe. (Well, this last sentence was very emphasizedly preceded by a huge "IF".)

*It is nothing to do with possible events at next week, I'm not an oracle to foretell the future. But even the story of dissociation was not a story of futue events, but story of what allegedly happened.
P.S, For those who are familiar with Hungarian here is a transcript of a TV program with a good economist, who apparently do not share the stupid approach of the "experts" and analysts. I'm proud of myself. :)

Wednesday, March 4, 2009

Business as usual and the distortion of time

Three days has passed since the informal EU summit at Sunday, an event in a series of meetings aiming to find solutions for the effects of the crisis. ECE is "dead again" or more precisely its leaders once again proved that they are not aware of the similarities in the region (or prefer to emphasize the differences) and ready to seek shelter at the expense of the others. (Irony was not missing once again, at least retrospectively. The Estonian premier was egaer to point out in how good conditions his country is, while two days later the Statistiocal Office published an almost 27% year on year drop of the industrial output.) Surprisingly the German chancellor shared their view as well, dismissing any idea of a common rescue package.

Although there were voices disappointed with the outcome of the summit, the news in Hungary soon became a means of hammering the prime minister, as it was considered as a heavy defeat for him, who earlier championed the idea of a 180 billion euro aid action before the meeting. As a result Hungary again was portrayed as the "sick man", "analysts" suddenly started to spread rumours on negative expectations and even the usual "misunderstanding" happaned again today. Some time ago the prestigeous Bloomberg translated a sentence of the prime minister incorrectly causing panic among "investors". Today the Hungarian agency for overseeing the financial markets misteriously was left out from a common statement of such authorities in ECE, pointing out the negative effects of unfounded allegations regarding the situation of banks in the region and emphasizing the differences in the situation of the countries. It was soon interpreted as a gesture of dissociation from Hungary, as if its situation would be the only problem in the region. Hungarian forint suddenly fell while other currencies in the region became stronger against euro. A choir of "experts" and "analysts" in Hungary were ready to hail the idea of dissociation, portraying Hungary as a country not able to grasp the severity of the situation and prophesizing that Europe will leave this state alone as it is not ready to bring about the necessary changes. The opposite trend of the ECE currencies while during trade hours today was immediately interpreted as a turn in the events, the markets at last realizing that only Hungary has problems and that only thi country is not willing to adapt itself to the needs of the moment. One "expert" (well, he is a model figure, general director of local investment funds of a multinational company, whose funds performed rather mediocry last year even though this genius - who two weeks after the fall of the Lehman Brothers issued a statement, that we were over the worst, the markets would calm down and 2009 would be a year of moderate growth - is in charge), this expert even interpreted Obama's remark consisting the names of Hungary and Ukraine as a diplomatic message to Hungary, expressing the opinion that Hungary flawed its economic policy.

It is not easy to retain even just a small fraction of composure in the light of those developments. I would admit that in the short run it could be a profitable tactics to portray every country in ECE as different ones, and buy yourself out from this mess at the expense of the others. (Although I'm henceforward inclined to think that any kind of failure in the region would eventually lead to the collapse of other countries, as "investor's" hands are shaky.) But even not to consider whether the crisis revealed more substantial factors behind the situatation than the simple malevolence of some obscure outer world full of bankers and speculants driven by thirst for profit and the bluntness of some millions of Americans making unbearable debts, that's something I would consider intellectual laziness. The more because it is a challenging problem, more challenging than posing as "experts" while only selling others ideas.

But another important problem, revealed by these events and opinions, regarding also the situation of ECE is the concept of economic and social time. (I mean the time necessary for profound transformations, long-run processes, evaluation of success or failure and time inherent in business and economic cycles etc.) As I mentioned in one of the earlier posts, in the transition period (not even finished today) one of the important issues was the time necessary for the catch up. It was always evaluated to be digestible (10-15 years), therefore no one was ready to admit that

a, he/she has no idea


b, it will last for many decades and many people (obviously voters at the next election) won't have a chance to experience it.

Economists, considered to be serious academics supported this assupmtion and began to evaluate definitive success of one country, and failure of the other in terms of economic preformance in one, two or three years at the best. They were even not ready to consider the possibility of changes in economic or social policy in this time span in the respective countries, not to speak of the horrifying perspective that growth is not necessarily self-sustaining, circumstances can be changed with the time and so on. Instead of making thorough analyses, using historical comparison based on data and facts they simply assumed that two or three good years are the sign of perennial economic success and two or three bad years prove that the respective country is doomed. The real time span of convergence - historically decades - were rejected, economic time was significantly distorted.

This fact in itself would have been enough to make a weird perception of economic time - either unrealistic or not in line with the peculiarities of economic history - dominant. But the situation was worsened by the emergence of brokers and "analysts" as "experts" and "economists". They were used to mesuring economic events and processes in days or in weeks at best and very often in hours. So-called economic websites and following their example others as well, began to provide news of the "fall" or "rise" of the currencies based on one or two trading hours. One can wake up with the news that forint collapsed or was "hit" and go to sleep with forint risen incredibly against euro or dollar. The same was true for the stock market as well. (For example as I'm writing this post forint regained today's losses completly and taking into account the primary cause of today's fall this is a similar performance to the other currencies today. I won't forecast that this trend will be continued or not as I'm not capable to do it, moreover, I think it is pointless, as the long run is more important. But if I were an "analyst", at the moment I would be completly justified to say that forint is moving in line with the regional trend.) As this is the dominant economic news, the perception of economic trends in general was transformed accordingly. Today every "expert" can forecast decades of economic develpoment from the events of the first few minutes at the markets.

How is this phenomenon connected to the problem of ECE? As I tried to outline earlier, ECE is perceived as a bunch of competing country's, front runners and laggers. But because of the distortion of economic (and historical) time, success is not estimated according to the necessary time span, but based on short term performance, not taking into account other factors. Therefore possible similarities, having their effects in the long run, are obscured by short term differences. Moreover, non-economic factors, like the necesity of a kind of social consensus expressed through the results of elections, possible changes in the demands of the electorate influencing economic policies are also erased from the model. This is not the perception of time necessary to operate democratic procedures, but the perception of time of enlightened absolutism, as democratic governments never will have enough time to act if they are judged based on one or two days movements on the markets.

Well, there is some hope. Obama, at the press conference cited above, made a remark, that he wouldn't adapt his action to the daily ups and downs of the stock exchange indices, rather he is willing to concentrate on long term objectives. He even made an analogy with the tracking polls in politics, expressing his opinion - ceratinly based on some experience - that the politician who acts according to daily movements in polls will lost the strategical objective. This part of the press conference obviosuly wasn't mentiond by our "expert".

P.S.: Something on today's events... and on similarities, differences.