Central Europe Activ

The financial and money markets have closed with a huge plus today after news came out that the IMF has reached a broad agreement with the Hungarian government. The scheme will involve the EU and possibly some EU member states, too.

“A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days. Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions,” Strauss-Kahn noted. [Update: According to the early morning announcement, this has become a megadeal, the IMF, the EU and the World bank putting together $25.1 billion/€20 billion].

It looks that the terms of the deal will force the government to stabilize its notorious spending habits, which may be more important than the loan itself, which is relatively small compared to the budget deficit or even compared to Hungary’s foreign currency reserves. The first news were talking about reducing the pay of public sector employees and public pensions. For the fist sight, these seems politically infeasible, but the minority government led by Mr Gyurcsány will almost certainly get the parliamentary approval for such a drastic public budget. It looks that one and a half years before the elections the popular opposition would be very happy if the government took the political of the inevitable public spending cuts.

Although Hungary is not part of the euro-zone, it is a middle sized EU country that is highly integrated into the European economy, and most of its banking sector is in Western European ownership. The European Central Bank had already given an emergency credit facility to the Hungarian central bank, which is should be available only within the euro zone. Some analysts argue that both the EU and the small, open economy countries that are integrated into the Single Market could have it cheaper if they could join the euro zone on a fast track. (Another applicant could be Iceland, which would need to apply for an EU membership, too). I believe that the size of these economies is so small compared to the eurozone that this argument is right: the possible damage caused by the freely floating small krone and forint is bigger than the inflationary risk of these countries within the ERM.

Just for the record: Ukraine has also signed an agreement with the IMF.

Former posts: Bailout Hungary, Turning the tables, Eastern Europe adrift.

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  1. I’m curious how the situation will unfold in Romania. We have smaller reserves than Hungary, but also a smaller public debt. Anyway, this year we also have parliamentary elections so we’ve witnessed lately plenty of populist governmental decision (which made our inflation reach 8%). The latest novely is a fight between the President and the Prime-Minister on increasing by 50% professors’ salaries. The decision is now under heavy political and legal contestation from the Prime Minister, but there are chances it will pass.

  2. We also had a 50% increase in teacher’s and doctor’s and nurse’s pay. It is much more painful to take it back than to not have it in the first place. From a political economy point of view I think it takes time until a newly democratic country’s electorate understands the connection of taxes, benefits, political and economic decisions on the personal and the public level. It looks very bold to increase public sector pay in the midst of a worldwide crisis and a European recession.

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