Let’s flash back quickly to yesterday (Monday). The big news of the day (at least as far as Central and Eastern Europe went) was that a number of East European central banks had reached an agreement to try to bolster their currencies via their first coordinated action since the start of the global financial crisis.
Czech, Polish, Hungarian and Romanian central bankers all agreed to speak publicly about the damaging effects of exchange-rate swings, according to the statement read by Romania’s central bank Governor Mugur Isarescu at a news conference in Bucharest. His counterparts in Prague, Budapest and Warsaw issued similar statements during the afternoon. The four currencies all gained significantly on the day. The Hungarian central bank even kept interest rates on hold to boost the currency, even though this will lead to an even sharper economic contraction and even higher unemployment. But how long did it all last?
Well, now fast forward to today, and a press conference in Brussels, attended by EU Commission President José Manuel Barroso and Hungarian Prime Minister Ferenc Gyurcsany. The message was meant to be that the Hungarian government was on the right path, and was going to receive full backing from the European Union. And how did our good prime minister “talk up” the currency?
“We’re in serious trouble indeed,” the Hungarian prime minister said.
And how did the forint react?
The sell-off on the forint market was almost immediate, and the Hungarian currency abruptly and sharply fell to over 303 to the euro from its earlier and hard won level of 297.
True all the talk about Latvian downgrades (see previous post) and East European weakness didn’t help, and the kind of verbal strategy decided on yesterday was always a sign of weakness rather than a sign of strength. As Danske Bank said in a report yesterday:
The markets might try to test whether this is just verbal intervention or whether the CEE central banks would be willing, for example, to hike rates to defend their currencies. The markets will be watching over the next days for more direct intervention in the CEE FX in the form of coordinated intervention and/or rate hikes. However, if they see that the talk is not being backed up by action, the depreciation of the region’s currencies could resume.
Still, you might have thought the policy would have lasted a little longer than 24 hours, and that the Hungarian people would have been a bit better served by their leaders.
It looks like lack of coordination between the central bank and PM’s office, which of course is exactly what you don’t want in a currency crisis — but in that respect sound a lot like the Polish situation and the disagreements over Eurozone entry. It’s a hoary cliche but a house divided cannot stand.
This was a misleading report – Gyurcsány was quoted out of context. The best way of capturing what he said was “the world has a pretty big problem, and Europe has a pretty big problem”. He didn’t mention Hungary in this connection. Just listen to the recording of Gyurcsány’s statement linked on the right hand of the following page: http://www.kormanyszovivo.hu/news/show/news_1466?lang=hu
This seems to me the ancient art of not knowing the language you need to know to report the event, and then making it up as you go along.
Hi,
Firstly I’m sure you are right. I mean I take it he actually says what you say he says.
“Just listen to the recording of Gyurcsány’s statement linked on the right hand of the following page:”
Well this is, I presume in Hungarian, a language in which, to say the least, I am challenged. But then, so I imagine are the rest of the journalists attending the press conference.
So I am rather astounded, since these remarks were intended (presumeably) for an international rather than a Hungarian audience, you would have thought he would have given the press conference in English (or at least French). Now Portfolio Hungary later carried this:
“Update: Government spokesman Dávid Daróczi told Bloomberg on the phone that the PM referred to the world economy when he said “trouble”.”
Which means it does have some resemblence to what he said, so you have to imagine the fault was with the translator, since this quote was used by more than Bloomberg.
I think it is a mistake to blame the press when you are trying to practice “verbal guidance”, especially if you are doing it in a language few understand (which only adds to the tragi-comic dimension of the whole thing), since the press are what they are, and you should factor this in from the start.
The thing is:
“We are in serious trouble indeed,”
Is actually the case, which is what makes the quote credible, it’s just noone would have anticipated him actually saying it (which he didn’t, but maybe the translator did). It also becomes credible when you think of his previous track record for tanking the forint (you know, the “we lied to them in the morning, we lied to them in the afternoon, we even lied to them in the evening….” speech).
Basically, as I suggest in the post, the damage is little, since I don’t think verbal intervention works, and the only way in the short term you can protect the forint from the absolutely horrid macro data we are going to see (and then the CHF mortgage defaults) is by raising interest rates, but then if you do that the data will be even worse, and the defaults more a flood than a trickle. So:
“We are in serious trouble indeed,”
Unless the EU steps in and rescues (ie with euro membership) default looms as we move forward.
Well Portfolio Hungary have clarified a bit more:
The government spokesman has quickly demanded a correction, saying the PM referred to the world economy when he said the above. The cabinet has published an audio recording on the kormanyszovivoi.hu website that made it clear the PM has not said “we†(Hungary). “Well, there is quite a trouble in the world… and quite a trouble in Europe,†the PM said. Click here to listen to the recording (Barroso speaks until 6:30, Gyurcsány starts his speech at that point, but after a few sentences in English he switches to Hungarian.)
So he did say a few words in English, and then move on to Hungarian. What a mess, I would say, and what a way of conducting press relations. Perhaps I should have titled this post “how not to conduct the ancient art of verbal intervention via press conferences in Brusselsâ€.
As P ONeill suggests, I doubt he OK’ed the “Well, there is quite a trouble in the world… and quite a trouble in Europe,†bit with the central bank before he caught the plane.
I really do think that an organization like Bloomberg should actually have someone who speaks and reads Hungarian to check what he said! And before you say no-one speaks it outside Hungary – I’m saying this as a British citizen, and a native English speaker, who does understand and speak Hungarian.
That having been said there is an issue of reputation. Gyurcsány does have form in making ill judged comments near microphones, including, but not restricted to his infamous comments on how to win elections in 2006.
@ Edward
“Basically, as I suggest in the post, the damage is little, since I don’t think verbal intervention worksâ€
Well, Thinking back to the times of Alan Greenspan, I am convinced that verbal intervention does work, al least to the short term that is. I can remember that the whole financial world was always analyzing every word he spoke, and that for instance the stock exchange immediately react to it.
Ron
Hi Ron,
“Basically, as I suggest in the post, the damage is little, since I don’t think verbal intervention worksâ€
Well, you are obviously right, verbal intervention can work if you have the clout to back it up, otherwise it is a sign of weakness. If you are forced to raise interest rates into a recession this is not a show of strength.
So what I said should have been:
“Basically, as I suggest in the post, the damage is little, since I don’t think verbal intevention “when you can’t back up what you say with muscular intervention” worksâ€