Hungary in the Financial Crisis: A (Basket) Case Study

Abstract

This article examines the impact of the recent global financial crisis on Hungary and uses this analysis to draw conclusions about Hungarian economic policy and performance over the last decade. The point at issue is that of why Hungary has shown such vulnerability to global developments and has been forced to obtain external support from the IMF. Conventional explanations for this vulnerability are reviewed and it is noted that such explanations generally centre on what has been seen as an irresponsible fiscal policy stance. While acknowledging the problems inherent in Hungarian fiscal policy during the last decade the article broadens the scope of the debate to include both domestic monetary policy and the nature of Hungary's integration into the international financial system. It is suggested that Hungary occupies an intermediate place with regard to Central and Eastern European economies; situated between the small open economies who have adopted either the euro or a currency board system and the larger economies who have allowed exchange rates to float. This position has led to inconsistencies and vacillations in Hungarian policy stances. The article concludes with some suggestions for an alternative approach to economic policy management for Hungary in the light of current difficulties.

Notes

¹ The paper, or any part of it, should not be read as an official view of either Corvinus University, or the European Bank for Reconstruction and Development (where the author is a board member).

² It is hard to prove what kind of hostile intentions were behind the run on the forint and OTP Bank, the largest commercial bank of Hungary, and the largest independent bank in Central and South-East Europe (meaning the new member states of the EU and the Western Balkans). The various speculations spreading in the markets, the institutions and occasionally in the press (an action originating from Russia, Germany, maybe America), too, may all contain a grain of truth, but revealing and proving them would be extremely difficult. Subsequent interviews with leading figures in financial government, Finance Minister János Veres (see Dózsa), Economy Minister Gordon Bajnai (see Farkas) and Central Bank Governor András Simor (see Bogár and Ferenc) discuss the events of 8 October, reinforcing the suspicion that there was a premeditated attack. In March 2009, the Soros Fund was fined for speculating and using illegal practices against OTP Bank.

³ It should be noted that the transition ratings of the European Bank for Reconstruction and Development have consistently portrayed Hungary as the most advanced transition country, ahead of Estonia or the Czech Republic (see various volumes of the Transition Report).

⁴ See for example Darvas, or for a more detailed discussion Matolcsy or an earlier analysis by Pogátsa.

⁵ Lámfalussy analyses the connection between the liberalisation of capital flows and crises and arrives at the conclusion that an unsubstantiated liberalisation may be one of the factors in bringing about a crisis, but the subsequent retraction of liberalisation can for practical purposes not play an effective role in managing the crisis.

⁶ It is worthwhile to compare the Hungarian situation with Poland's. Loans in foreign currencies are substantial in the latter country, too, but since the difference in the interest rate of the domestic and the foreign currencies is not substantial, those applying for credits do not feel financially compelled to opt for the foreign currency, thus disregarding the exchange rate risk.

⁷ In the 1980s, Hungary could only turn to the Bretton Woods institutions. This time, the EIB, the EBRD, the CEB, the ECB also offered options (in various ways), in addition to using the IMF and the World Bank Group again.

⁸ In South Korea— which until then had been a relatively intact, centrally controlled capitalist economy—the various international investor groups won major positions as a result of the crisis. Previously there was Daewoo, now there is Chevrolet instead (at the time of writing). Domestic capital thus lost key positions.

⁹ During the crisis the currency board, which had been considered a success prior to the crisis, was abolished, a drastic currency devaluation occurred and several years of depression followed.

¹⁰ The establishment of “Bangladesh”-type micro-credits in the regions of Hungary afflicted by usury (primarily in the eastern half of the country) could be achieved with relatively modest resources, cooperation of commercial banks and some state-provided incentives.

¹¹ At the time of the conclusion of this article, government officials are designing proposals to the effect that the state will assume the mortgage payments of individuals who have lost their jobs (for the duration of their unemployment). An even more active state role is conceivable with a direct intervention in the housing market, even though the risks of such a course are considerable (because of the well-known cases of real estate-related corruption in municipal governments).

¹² Szelényi.

¹³ Vigvári.

Additional information

Notes on contributors

László Andor1

1 The paper, or any part of it, should not be read as an official view of either Corvinus University, or the European Bank for Reconstruction and Development (where the author is a board member).