Hungary’s Prime Minister, Ferenc Gyurcsany, announced this morning (Saturday) his intention to resign as Prime Minister. Gyurcsany informed a congress of the Socialist Party of his decision following a sharp fall in the popularity of his government.

Gyurcsany will now inform the Hungarian Parliament of his decision (probably on Monday), and attempt to initiate a “constructive” no confidence vote, by which means it is hoped that a new candidate for PM will emerge. Early elections are currently thought to be unlikely, although it is not clear at this point how the minority coalition partners will react.

Well, we now have a clear pattern being established following the recent IMF interventions in Iceland, Latvia, Hungary etc – the government collapses under the weight of the measures. Basically, and as I said during the week, what we have unfolding before us in Hungary is a tragedy, since the rigid enforcement of the deficit ceiling without external fiscal injections from the EU, simply means that the economic contraction feeds upon itself.

I hear that I am the obstacle to the co-operation required for changes, for a stable governing majority and the responsible behaviour of the opposition,” he was quoted as saying on Saturday by Reuters news agency. “I hope it is this way, that it is only me that is the obstacle, because if so, then I am eliminating this obstacle now. “I propose that we form a new government under a new prime minister.”

Irrespective of whether or not Gyurcsany was part of the problem rather than part of the solution, and despite the fact that Hungary may benefit from having a new leader, the issue is a much bigger one than the office of Prime Minister.

Amongst other matters, this is the principle “bottleneck”:

The source said talks with parliamentary parties would start next week to pick a new premier as soon as possible to pass much-needed budget measures with a stable majority.

According to this Reuters report, the Slovenian Minister of European Affairs and Development Mitja Gaspari informed a news conference in Ljubljana yesterday (Thursday) that the latest OECD 2009 forecast for the eurozone is for a contraction of 4.1 percent. He also stated that the OECD figures show Germany’s economy will contract by 5.1 percent and Italy’s by 4.2 percent. While these figures are completely unofficial – official publication of the updated OECD forecast is due on March 31 – they do not seem at all unreasonable, although they are of course shocking. At think at this stage talk of a recovery in the second half of the year is completely premature, and the only real issue is whether 2010 will simply be more of the same, or will be a bit better (a eurozone contraction of say 2%).

The previous OECD forecast, issued on November 25, showed euro zone 2009 GDP down 0.6 percent, Germany down 0.8 percent and Italy down 1 percent. I think the current numbers are now in the right order of magnitude, and the debate will obviously be about what to expect for next year.

The IMF yesterday published an “update” eurozone forecast of a 3.2% 2009 contraction, but also reported it was still “working on its projections”.

Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin (see table). The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.

With capital inflows to the CEE economies slowing to a trickle in Eastern Europe, a sharp correction is now underway in most countries’ external imbalances and in particular in their current-account deficits. For the CEE-6 (Poland, Czech Republic, Hungary, Romania, Bulgaria, Turkey), net private capital flows are forecast to slow to $59.5 billion in 2009, down from an estimated $161.9 billion in 2008, according to estimates from the Institute For International Finance. The basic concern is that those countries with significant external deficits are extremely vulnerable to foreign capital reversals, especially in the current environment of global credit tightening.

FDI flows (which are generally considered more stable and less susceptible to rapid outflows than other capital flows) have been the main form of financing for current-account deficits in recent years, but such inflows are set to slow sharply in 2009. The Economist estimates that between 2003 and 20007 FDI inflows (on average) covered almost 100% of the current-account deficit in the ten EU member states. In 2008, this coverage fell to an estimated 55%

As FDI has fallen back, debt – particularly intra-bank lending – has become the main financing vehicle for the current-account deficits. Nevertheless, intra-bank lending – that is, lending between foreign parent banks and their subsidiaries in the region – is falling back sharply in 2009, with nett bank lending to emerging Europe, excluding Russia, being projected at around $22 bn in 2009, down from $95 bn in 2008 (according to the Institute for International Finance)

Now the central issue is that such corrections in external imbalances can take pplace in one of two ways – either domestic demand drops sharply and/or the currencies weaken significantly. In the case of those countries with an exchange rate peg the second route is not open, hence what we are likely to see is a very sharp contraction. Such contractions are already evident in the Baltics, but what about Bulgaria. How sharp will the correction in Bulgaria be? Only today capital economics have come in with a forecast of 5% contraction over the year. But how realistic is this, let’s look at some data.

Well, we could start with this little deatil: retail sales down 25.7% month-on-month in January, according to the national statistics office. For an economy which has been driven by a consumer borrowing and lending boom, that looks like dramatic evidence of some kind. It looks like dramatic evidence, but it isn’t really quite so dramatic as it appears at first sight, and the first warning I would issue to anyone who wants to study the Bulgarian economy is never to believe anything you see at first sight.

The data came from a Bulgarian press source (see extract below), but they evidently had no idea what they were talking about, since they confused the basics of year on year and month on month, and obviously non seasonally adjusted sales are down massively January over December, every year. Actually according to Eurostat, seasonally corrected sales were down only 0.15% month on month, and were even still up 4.79% year on year, although this is still a very large drop from the 20% rate of increase registered earlier in the year. So the basic point would seem to hold, that Bulgaria’s economy is now in freefall, but I have learnt something: never, ever, cite material from direct Bulgarian sources without checking.

Retail sales revenue in Bulgaria declined by 25.7% in January from the same month of last year, the National Statistical Institute (wwwo.nsi.bg) said in a statement. The slump was attributed to a sharp decrease in retail sales of larger consumer goods, although a decline is normal for the beginning of each year. A major 31.5% drop was reported in sales of vehicles and technical maintenance. Revenue generated by non-food sales went up by 3.0% year-on-year, the data showed. Revenue from food, beverages and cigarettes sales showed a minor increase of 0.5%

Continue reading →

According to Secretary of State at the Hungarian Finance Ministry László Keller Hungary will post a public sector deficit of HUF 332.9 billion in the month of March, up from the preliminary forecast of HUF 329.8 bn made only a month ago. At the same time the Finance Ministry has left its full-year deficit projection of HUF 730.6 bn virtually unchanged from the one made a month ago of HUF 729.9 bn. (In fact the entire Q1 deficit is expected to run to HUF 581bn or 2.2% of annual GDP. This seems like a huge chunk of the whole years deficit spent already, but we should remember that there is a strong seasonal component here, and for comparative purposes we could note that the actual deficit for Q1 was HUF 508bn or 1.9% of GDP, so while the situation is not good, it may not be as bad as it seems at first sight).

However, as the months pass the ability of the government to live up to its budget objectives seems more and more remote, despite constant reassurances from Keller that “The cabinet is in control of the situation” and that “The government wants to keep the budget deficit under 3.0% (of GDP) at all costs”. Continue reading →

Ten Year Bond Spread Between Between Greek and German Benchmarks Post 1999

The Greek government announced this week that it is introducing a public sector wage freeze together with and a one-off tax for high-income earners in an attempt to prevent the budget deficit from spiralling yet further out of control. The measures, which were announced on Wednesday, constitute a significant change of discourse from a government which until now has claimed Greece’s service-based economy could avoid falling into recession. Speads on European government bonds widened again this morning The difference in yield between German and Irish 10-year government bonds, increasing five basis points (to 281 basis points), the most since February 1993. Portuguese, Spanish and Greek (see chart above) spreads also widened versus the German benchmark.

Basically what follows is a brief examination of the evidence we now have to hand for a sudden and sharp slowdown in Greek GDP, and of how this may influence future expectations on the spreads. This follows in the path of my two previous Greece related studies:

Why We All Need To Keep A Watchful Eye On What Is Happening In Greece

and

The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation Continue reading →

From Wikipedia:

Enric Duran, also known as “Robin Bank” or “Robin Hood of the Banks” is a Catalan anticapitalist activist and member of the “Temps de Re-volts collective”. On September 17, 2008, he publicly announced that he had ‘robbed’ dozens of Spanish banks of nearly a half-million euros as part of a campaign of political action to denounce what he termed the “predatory capitalist system” and finance various anti-capitalist movements. From 2006 to 2008, Duran took out 68 commercial and personal loans from 39 banks with no guarantees or properties as collateral. Duran published an article entitled “I have ‘robbed’ 492,000 euros from those who most rob us in order to denounce them and build some alternatives for society” explaining via the internet that he had taken out a series of loans from numerous Spanish banks as well as publishing his “confession” in the Catalan magazine Crisis. Duran called his action an act of ‘financial civil disobedience.’

Of course, while Timothy Geithner recieves a supportive understanding pardon for his “sin of omission” (he forget to present adequate tax returns), and AIG directors continue to haggle about their bonus payments, Duran is whiling away his time in prison awaiting trial on charges of fraud. There is a fairly credible rumour going the rounds that he will be receiving no support from the official government “bail”-out fund.

Meantime we are constantly reassured that Spain’s banks are completely sound, that every loan was judiciously and meticulously checked, and that there really is nothing at all to worry about.

My point here is not to defend Duran’s actions, but to highlight the double standards embodied in the way we go about things. I think his case can also give us some inkling of an insight into why it is that some of our young people are now becoming so disaffected. Apart from being left with the lions share of the debt to pay off over the years to come, they will also be called upon to sustain our ever more fragile pension systems.

We are told that recovery is just round the corner, maybe as soon as the end of this year. Personally I fail to see how this can be the case, not only because none of the macro economic data I am looking at are consistent with such a view, but also because it isn’t at all evident how things can ever “correct” themselves while we still have such a massive “values overhang”. Part of the problem we just got into was about greed (it always is), not just the greed of those who wanted an ever bigger cash bonus, but the petty greed of all those millions who got themselves ever deeper into debt on the basis of the flawed idea that the price of their home (or second home) would simply go up and up forever. We still have a lot of “cleaning out” to do in this department, all of us, before what is steadily getting worse can start getting better.

The much maligned Keynes went to work as a volunteer at the Bank of England during World War II, the man who was arguably the twentieth century’s greatest philosopher (Ludwig Wittgenstein) spent the war as a porter in Charing Cross hospital (he was already old, and a pacifist), while one of Russia’s greatest painters, Pavel Filonov, starved to death in 1943 since stayed behind in a beseiged Leningrad simply to take care of a sickly old woman. When we start to see people of this calibre up there and running things, then we will know we are starting to emerge from the crisis. Meantime, its “war” as usual, although hopefully not the type of “class war” that Duran and his associates would have us get ourselves into.

Of course, these scenes shot outside Barcelona’s central university yesterday afternoon are one good example of how NOT to handle the crisis.