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Toughest Job In Hungary? - Central Banker

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It’s not easy being a central banker in Europe — especially during the biggest economic crisis in a generation.

But Andras Simor, the governor of the Hungarian Central Bank, has it even worse than his fellow monetary policy makers around the Continent. The new government of Viktor Orban has not just put the blame on Mr. Simor, among others, for Hungary’s stagnant economy but has also slashed his salary by 75 percent.

At the same time, the government in Budapest has attacked him for offshore investments in Cyprus and now, insiders say, may even consider pressing criminal charges against him in a bid to force him from office.

What those charges might be is unclear, and Mr. Simor says there is no basis for any accusations of wrongdoing. In Brussels, the European Commission is pondering a legal challenge on the basis that the government’s pay cut is an unwarranted interference in the operations of the central bank. A press officer for the Hungarian government did not respond to questions about the central banker’s standing.

The fight Mr. Orban has picked with his central bank head — after sweeping into office earlier this year with a populist campaign that brought him an overwhelming parliamentary majority — is not likely to remain confined to Hungary. It also reflects a larger struggle that is expected to play out over the next year or so as most European politicians, following Germany’s lead, seek to impose fiscal discipline on their increasingly unruly citizens.

Mr. Orban is tapping into a deep vein of social resentment in Hungary, where the median wage remains not much higher than it was when the nation broke free from the disintegrating Soviet empire in 1989. His criticisms of foreign banks, speculators and most recently the European Union and the International Monetary Fund have found a ready audience in a country that has experienced five consecutive years of government-imposed austerity.

And they could serve as a template for opposition politicians in several other countries, including Spain, Portugal, Ireland and Greece.

Demonizing Mr. Simor and cutting ties with the I.M.F. — which the Orban government did two weeks ago in a dispute over how to pare the deficit — may well be crowd pleasing in Hungary, especially with local elections due this fall. But such an approach also runs the risk of alienating European allies and foreign investors, precipitating the type of speculative run on the forint that brought Hungary to the brink of bankruptcy in 2008.

Indeed, with the government now appearing set to pursue a more expansionist fiscal policy, the odds are growing that it will miss its deficit targets and expand the debt — already at 80 percent of G.D.P. That could push Hungary into a Greek-style funding crisis early next year when it must repay close to $30 billion — including an additional €2 billion, or $2.6 billion, in loans from the I.M.F. that the fund would have covered if the government had reached agreement with the international lending agency.

“This is a very dangerous course of action,” said Peter Rona, an economist in Budapest who argues that without the I.M.F. imprimatur, Hungary’s short-term funding needs and high levels of foreign currency debt increase the risk of a financial crisis. “The mismatch on the Hungarian balance sheet,” he added “is very substantial.”

Mr. Orban is the first major European leader to challenge the new orthodoxy of budget cuts and structural reforms that has swept Europe since the onset of the Greek crisis late last year. With the I.M.F. or without, governments in Athens, Madrid, Lisbon and Dublin have enacted ground-breaking austerity programs. But as the Hungarian case is showing, the true test is whether governments can maintain their tightness long enough to reach the deficit target — 3 percent of G.D.P. — set by Europe for its members that belong to the euro club or aspire to join it.

Since 2006, Hungary has brought its deficit down from 9 percent of G.D.P. to a current level of about 3.8 percent — an impressive policy achievement that has also taken a deep social toll. Unemployment is 11 percent and retail sales are shrinking. Adding to Hungary’s woes, 1.7 million people in a country of 10 million hold foreign loans that have become increasingly difficult to repay because of the forint’s weakness against the euro and the Swiss franc.

Mr. Orban has won political backing by insisting that enough is enough. He has announced plans to reverse a recent increase in the retirement age, proposed a one-off tax on the country’s banks and trumpeted a mini-stimulus called the Szechenyi Plan in honor of Istvan Szechenyi, a 19th-century reformer who pushed a then backward Hungry to modernize and grow.

Mr. Orban says he can meet the I.M.F.’s target of 3.8 percent this year. But next year, when Hungary is supposed to bring its deficit below 3 percent, is another matter.

“The big problem is 2011,” said Christoph Rosenberg, who led the fund in its talks with Hungary. “Given Hungary’s high debt level and its vulnerability to financial flows, it is important that they reduce the deficit from this year’s level.”

So far, the markets have been fairly tolerant. Rates at government auctions have increased and the forint has weakened by about 4 percent, but there has been no panic yet.

“Investors think that Hungary and the E.U. will do a deal,” said Peter Attard Montalto, a fixed-income analyst at Nomura. “But we don’t think the E.U. will do a deal without the I.M.F. at the table.”

In many respects Mr. Simor, a former chairman of Deloitte & Touche in Hungary, is the perfect foil for Mr. Orban’s nationalist approach.

“I think they will go after him,” said Gyorgy Lazar, a Hungarian-American investor who writes frequently on Hungarian financial matters. “These guys are from the countryside,” he said, opposed to the “refined intellectual sensibilities of the Budapest elite” reflected in Mr. Simor’s image.

Hungary is to implode, trying to expand there way out of this with there debt levels service costs will ultimate crash the economy, the mathematics are inevitable the question is at what level do you reach tipping point.

I'm starting to wonder whether 10% is in fact the actual equilibrium for the unemployment level in a modern economy where the pressure is on for both partners to work.

I can't remember any other central banker through this current crisis been gone after like Andras Simor, so far Bernanke and King have got away with it. Certainly no one has question Greenspan or Eddie George for their role in this mess.

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  • 396 Brexit, House prices and Summer 2020

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