Hungary's agreement with the IMF cannot happen without a change in the government's economic policy. However, such a change would make an agreement with international lenders unnecessary, former Governor of the National Bank of Hungary György Surányi said in an interview with news portal Origo.hu.
"Should the government make no change to the current economic policy line, Hungary's chances for a siuccessful agreement with the IMF will be slim," Surányi claimed. "On the other hand, after a major policy change Hungary would no longer need assistance from international lenders." The former NBH Governor believes once confidence in HUngary's economic policy is restored, with or without the IMF, government bond yields may drop 1.5 to 2 percentage points and the EUR/HUF rate would stabilize slightly below 280. There would be wide-ranging positive impacts on foreign investment, growth, employment, fiscal position and inflation.
Commenting on the government's plans to use foreign currency reserves, Surányi has expressed a view that the purpose for which Hungary is seeking to do so is within reasonable limits and should not be an issue. "Problems begin when someone believes you can go against market trends forever".
In the former NBH Governor's view, Hungary's national economy has been off track since 2001 except for one year during the Bajnai administration. In the two years that have passed since the 2010 elections, the government has likewise failed effect changes to the unfavorable external trends and internal trends dating back to earlier times. The reason Hungary has a large foreign trade balance is because there is no investment in Hungary and consumption is also on the decline. In order to achieve 3% economic growth, an investment rate of 23% to 25% would be necessary, as opposed to the current 16% which is the lowest in Europe except for Greece and Ireland.
The flat income tax regime has failed to deliver the expected results; it has failed to trigger an increase in demand or to help legalize the gray economy; on the other hand, it blew a massive hole in the budget. As for improving the situation of the the middle class, at best it has helped the highest segment of that. Sector-specific taxes have only made the situation worse, as did the bank tax, which is 12 to 14 times higher than in the UK or Sweden. Surányi expressed concern that the proposed financial transaction tax is no going to restore either the confidence of economic actors or the normal business environment of the banking sector.
As concerns the eurozone crisis, Surányi argued the ECB should not have bought Greek government bonds at all, as Greece's troubles were more than a liquidity crisis - it was a solvency crisis. The right course of action would have been proper bankruptcy proceedings. The eurozone countries must not let their budgets slip, however by keeping deficit at 2% and meanwhile spending more on infrastructurre, R&D and education, the eurozone would be able to boost its own internal growth as well as those of the periphery. Periphery countries must accept crisis management, lower nominal wages and fiscal restraint.
In order to avoid the current situation evolving into a permanent spiral (fiscal adjustment, economic recession, increased budget deficit, more fiscal adjustment, deeper economic recession), it would be necessary for international organizations, as well as for private lenders, to accept they have lost part of their money. This applies not only to Greece but also to Spain, Ireland and Portugal. Whether losses amount to 40%, 50% or 70% is specific to each country. in addition, expansive monetary policy is needed, Surányi argued.
Source: Origo, Portfolio