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Hungary Blames Its Central Bank for a Fiscal Crisis

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 most. Not only has the new government of Viktor Orban placed the blame on Mr. Simor, among others, for Hungary’s stagnant economy, it has slashed his salary by 75 percent.

Budapest, Hungary
PNC | Brand x Pictures | Getty Images
Budapest, Hungary

The Hungarian government has attacked him for holding offshore investments in Cyprus and, insiders say, now may even consider pressing criminal charges 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 to the policy maker’s pay cut on the basis that it is an unwarranted interference in the operations of the central bank. A spokesperson for the government in Budapest did not respond to questions about the central banker’s standing.

The fight that 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 unlikely to remain confined to Hungary. It 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 Greece, Ireland, Portugal and Spain.

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 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 expansionary fiscal policy, the odds are growing that it will miss its deficit targets and expand the debt — already at 80 percent of gross domestic product. That could push Hungary into a Greek-style financial crisis early next year when it must repay close to $30 billion — including 2 billion in euros to the I.M.F. that the fund would have covered had it come to an agreement with the Orban administration.

“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, Dublin, Lisbon and Madrid 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 the nation’s output — set by Europe for those in the euro club.

Painful Cuts

Since 2006, Hungary has brought its deficit down to about 3.8 percent of economic output, from 9 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 what was then a 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 B. 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 Holdings. “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 government and its 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, of the new administration, as opposed to the “refined intellectual sensibilities of the Budapest elite” that Mr. Simor represents.

Mr. Lazar’s view, one that is shared by the Orban camp, is that Mr. Simor’s high interest rate policy is primarily to blame for Hungary’s current economic woes. “Thousands of businesses have gone bankrupt, industries have suffered,” Mr. Lazar said. “He should have reduced interest rates faster.”

The central bank’s 5.25 percent benchmark rate is among the highest in Europe. But Mr. Simor argues that high rates are still needed to maintain the confidence of the foreign investors that Hungary, with its punishing debts, is so reliant on.

In an interview, Mr. Simor would not comment on his tense relationship with Mr. Orban, who he has not yet met since the change in government.

But in the recent release from its monetary council, the bank made clear its disappointment with the breakdown in talks with the I.M.F. and the European Union.

“The I.M.F./E.U. umbrella was very important in keeping the confidence of foreign investors,” Mr. Simor said. “Giving up this umbrella increases the vulnerability of the Hungarian economy.”

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