Funding Hungary: competing crisis management priorities of troika institutions

ABSTRACT

This paper investigates the crisis management approaches of the troika institutions during the liquidity trap episode experienced by Hungary in October 2008. I demonstrate stark differences in the three institutions’ interpretation of the crisis’ origin that influenced the recommended policy responses: the IMF team was concerned with financial markets; the EU Commission emphasised the fiscal component of the crisis and recommended austerity measures, and, finally, the ECB focused primarily on the monetary stability of the Eurozone and overlooked the consequences of its decisions for EU member states outside the Eurozone. The paper argues that for Hungarian policy-makers the greatest challenge in crisis management was not the harshness of the austerity measures, but overcoming difficulties generated by the competing crisis management priorities of the troika institutions. The paper concludes with a note on policy coordination as a recurring obstacle to the troika’s effective crisis management.

KEYWORDS:

• European Central Bank (ECB)
• European Union (EU)
• International Monetary Fund (IMF)
• Hungary
• financial crisis
• troika

Acknowledgements

I would like to thank Judit Neményi, Katalin Mérő, Mihály Laki, Andreas Antoniades, and the anonymous referees for their comments on previous drafts of this paper. I also would like to acknowledge the excellent research assistance of Zsolt Hegyesi.

Notes

1. Kornai, “Hungary’s U-Turn.”

2. Johnson and Barnes, “Financial Nationalism.”

3. Bohle, “Post-Socialist Housing.”

4. Győrffy, “Austerity and Growth.”

5. Epstein, “When Do Foreign Banks ‘Cut and Run’?”

6. Andor, “Hungary in the Financial Crisis.”

7. Benczes, “From Goulash Communism.”

8. Lütz and Kranke, “The European Rescue of.”

9. This study is an important source for contextualizing Henning’s argument in ‘Tangled Governance’ about the reasons for the IMF involvement in the Eurozone crisis.

10. Barnett and Finnemore, “The Politics, Power, and Pathologies.”

11. Hay, “Narrating Crisis.”

12. Király, “Likviditás válságban.”

13. Váhegyi, “Sebezhetőség.”

14. Király et al., “Contagion.”

15. Király, “Az amerikai.”

16. Várhegyi, “Sebezhetőség.”

17. Tóka and Popa, “Hungary.”

18. Tóka and Popa, “Hungary.”

19. Várhegyi, “Sebezhetőség.”

20. The attack against OTP was launched by Soros Fund Management LLC, by HSBC and by Deutsche Bank AG London (Hungarian Financial Supervisory Authority 26 March 2009).

21. Ecorys, “Ex-Post Evaluation,” 35.

22. Mérő and Piroska, “Policy Diffusion, Policy Learning.”

23. IMF, “Hungary.”

24. Letter of Intent.

25. IMF, “Hungary,” 6.

26. These targets are also included in the LoI, in addition to a number of other fiscal, financial market and monetary targets.

27. ECB, “Annual Report,” 109.

28. ECB, “Monthly Bulletin.”

29. 12 December 2007 ECB establishes swap agreement with Federal Reserve USD 20 bn, the first, followed by many.

30. 15 October 2008 ECB establishes swap agreement with Swiss National Bank CHF 25 bn per tender.

31. 20 December 2007 ECB establishes swap agreement with Sveriges Riksbank EUR 10 bn.

32. 26 October 2008 ECB establishes swap agreement with Danmarks Nationalbank EUR 12 bn.

33. 16 October 2008 ECB establishes repo agreement to provide euro to Magyar Nemzeti Bank EUR 5 bn.

34. 11 November 2008 ECB establishes repo agreement to provide euro to Latvijas Banka EUR 1 bn.

35. 21 November 2008 ECB establishes repo agreement to provide euro to Narodowy Bank Polski EUR 10 bn.

36. ECB, “Monthly Bulletin.”

37. ECB, “Monthly Bulletin,” 75.

38. Neményi, “A monetáris politikai.”

39. ECB, “Annual Report,” 99–104.

40. Epstein, “When Do Foreign Banks ‘Cut and Run’?”

41. Kiraly et al., “Contagion.”

42. Howarth, “Defending the Euro.”

43. Trichet, “The Financial Crisis.”

44. Gabor, “The Power of Collateral,” 27.

45. Epstein, “When Do Foreign Banks ‘Cut and Run’?”

46. IMF, “Hungary.”

47. http://www.portfolio.hu/users/elofizetes_info.php?t=cikk&i=229691.

48. Mérő and Piroska, “Banking Union and Banking Nationalism.”

49. Johnson and Barnes, “Financial Nationalism.”

50. Moschella, “Negotiating Greece.”