IMF & EU pull the plug on Hungary

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machinehead
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IMF & EU pull the plug on Hungary

Magyars acting badly, say their financial overlords:

European equity and credit markets are braced for a volatile day of trading after the International Monetary Fund (IMF) and the European Union dramatically withdrew a €20bn (£17bn) financing deal for Hungary over the weekend.

The move, which was described by economists as “very rare”, means that Hungary will not have access to standby funds that were secured as part of a 2008 loan deal. The credit line was suspended on Saturday after the European Commission voiced concerns over the newly-elected Hungarian government’s budget plans.

The stark move by the IMF and EU will reignite fears in global stock and money markets about the state of Europe’s sovereign debt. It could also derail the fragile confidence that has been returning to markets after moves to resolve the economic crisis in Eastern Europe.

Viktor Orban, Hungary’s prime minister who was elected in the spring, last month unveiled a significant austerity package. However, the European Commission deemed this to be “largely of a temporary nature” and said that the measures “fall someone short” of what is required. In a statement, the IMF said that Hungary must to reassure markets by achieving the budgetary targets.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7897459/Markets-braced-for-turmoil-after-IMF-and-EU-withdraw-17bn-Hungary-financing-deal.html

Well, this is a new twist in the austerity passion play. The IMF and EU are happy to help even hopeless cases such as Greece, as long as brutal budget cuts are made. But in Hungary's case, failure to wield the budget ax with sufficient alacrity has resulted in a rude ejection by the banksters' bouncers.

The EU seems not to get the concept of contagion. If Hungary goes down to sovereign default, eastern and southern European debt, from the Baltics to the Balkans, will be sold mercilessly. 

Goodnight, Budapest! Hope you're still there in the morning. Surprised


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machinehead
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Re: IMF & EU pull the plug on Hungary

Bloomberg's take:

The Hungarian forint has lost 6.5 percent against the euro in the past three months, the worst performance among 177 currencies tracked by Bloomberg. The yield on the benchmark three-year government bond rose 153 basis points to 6.93 percent July 16.

Prime Minister Viktor Orban won a landslide victory in April by pledging to end the budget cutting strategy of his predecessors, which helped reduce Hungary’s deficit to 3.8 percent of gross domestic product in 2008 from 9.3 percent in 2006. The shortfall may widen to 4.1 percent this year, compared with the EU target of 3 percent, according to the European Commission.

While the government sought to ease concern by pledging to stick with this year’s deficit target of 3.8 percent of GDP, it continued to seek relief from the 2011 goal. The government tried to persuade the IMF to accept a deficit target of as much as 3.8 percent of GDP for 2011 instead of 2.8 percent, Economy MinisterGyorgy Matolcsy said in a July 2 interview.

The EU, in its statement, welcomed Hungary’s commitment to the 2010 deficit target and said Hungary has one of the lowest budget deficits in the 27-member bloc.

“However, the correction of the excessive deficit by next year will require tough decisions, notably on spending,” Olli Rehn, economic and monetary affairs commissioner, said in the statement. “Care will also be needed to ensure a stable environment for both domestic and international investors.”

http://noir.bloomberg.com/apps/news?pid=20601085&sid=a1QlR61m76RA

Let's put this in perspective. Countries such as Britain and Greece are running budget deficits north of 10% of GDP. By contrast, Hungary, after four years of austerity, has cut its deficit from 9.3% of GDP to 3.8% of GDP. Austerity-weary voters gave a landslide victory to a government which pledged to ease up a bit. Now, because Hungary won't get under the Maastricht limit of a 3% of GDP deficit in 2011 -- two or three years earlier than much of the rest of Europe -- the IMF and EU pull its financing package.

That is hard-nosed, hard-a$$ed. Hungarians must feel doubly slapped in the face -- instead of being rewarded for being more responsible than their peers, they're being punished for their electoral choice. 

The European wagon is creaking. One of these days, austerity is going to come a cropper, and a wheel's gonna fall off. Kind of reminds one of the last days of the old Austro-Hungarian empire, don't it? 

 

 

 

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machinehead
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Re: IMF & EU pull the plug on Hungary

Monday morning update from the NYT:

Facing growing public anger over budget cuts, Hungary’s conservative government insisted Monday that it would not impose further austerity measures despite pressure from its international creditors.

Markets in Budapest reacted badly Monday after the International Monetary Fund and European Union officials suspended a budgetary review in Budapest over the weekend.

The Hungarian forint fell as much as 2.8 percent against the euro. The currency is now at its weakest since June 7. Yields on Hungarian debt jumped, and the main stock index was down more than 2 percent in midday trading.

http://www.nytimes.com/2010/07/20/business/global/20forint.html?hpw

Hungary is a leading indicator because it embarked on an austerity drive three years ahead of the rest of Europe. Its voters are now tired of austerity, and elected a government which reflects their views.

This pattern will be repeated elsewhere in Europe, and with more radical results in some cases -- such as governments enacted on a program of  'denounce, default and devalue.' 

What everyone knows, but is loath to say, is that those who devalued first in the 1930s received the most benefit from it. Those who waited (e.g., the U.S., which completed its devaluation of the dollar against gold only in 1934) were plunged into a deflationary abyss.

The debt-ridden global economy resembles a quick-draw pistol competition, where all the participants are standing in a circle. 

'First-mover advantage' is no laughing matter. Surprised

 

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SagerXX
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Re: IMF & EU pull the plug on Hungary
machinehead wrote:

'First-mover advantage' is no laughing matter. Surprised

Who in the US can effect policies that would convey "first mover" advantage to the US?  Fed?  USgov?  (And if it's the latter, would it be an executive branch thing?)

Thanks for your thoughts, MH (or whoever responds, but thanks either way to MH for his ongoing play-by-play on subjects various)...

Viva -- Sager

machinehead's picture
machinehead
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Re: IMF & EU pull the plug on Hungary
SagerXX wrote:

Who in the US can effect policies that would convey "first mover" advantage to the US?  Fed?  USgov?  (And if it's the latter, would it be an executive branch thing?)

Man, you ask such awkward questions! Smile

Officially, the US Treasury (Tim Geithner) is responsible for foreign exchange policy. When Ben Bernanke testifies to Congress (as he will do on Wednesday), he regularly sidesteps queries about the dollar, on the grounds that it's not his bailiwick.

But the Federal Reserve, by controlling the money supply, really has more influence over the long-term value of the dollar than the U.S. Treasury, which can intervene in the forex market, but rarely does so.

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SagerXX
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Re: IMF & EU pull the plug on Hungary
machinehead wrote:
SagerXX wrote:

Who in the US can effect policies that would convey "first mover" advantage to the US?  Fed?  USgov?  (And if it's the latter, would it be an executive branch thing?)

Man, you ask such awkward questions! Smile

Officially, the US Treasury (Tim Geithner) is responsible for foreign exchange policy. When Ben Bernanke testifies to Congress (as he will do on Wednesday), he regularly sidesteps queries about the dollar, on the grounds that it's not his bailiwick.

But the Federal Reserve, by controlling the money supply, really has more influence over the long-term value of the dollar than the U.S. Treasury, which can intervene in the forex market, but rarely does so.

I was an awkward kid growing up, so I come by it naturally.  <grin>

Thanks again for the 4-1-1...

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