Hungary seems on the verge of caving in to pressure from the European Union (EU) and International Monetary Fund (IMF), an event which is at once both excellent news and a recipe for failure.
Good news because Hungary, in order to win a new bailout and continue to receive EU funds, is likely to have to row back from a host of policies which threaten its central bank's independence and the freedom of its media.
The only slight complication is that the policies of sobriety and austerity Hungary will be forced to adopt are unlikely to see the country safely through the coming European recession, and may well leave it considerably worse off.
After month of obstreperousness, Prime Minister Viktor Orban abruptly turned conciliatory, saying this week he was open to “any kind” of credit line, signalling that he may row back from a family of policies, including curbs on central bank independence, which have drawn widespread international objections.
The EU on Wednesday threatened to take Hungary to court over laws it contends may violate the union's rules on central bank and judicial independence and data protection. It also threatened to withhold subsidies, a move it said would shave 1.7 percentage points from Hungary's gross domeestic product (GDP).
It's easy to see the Hungary confrontation with the IMF and its European partners as a contest between anti-democratic, reactionary forces on the Magyar side versus democracy, openness and technocratic management on the other.
That's both true and not true.
Let's be blunt; the policies of the current group running Hungary are deeply objectionable. Besides filleting central bank independence under new laws, Hungary was only able to meet, in name only, its 3% deficit target in the last year through wholesale appropriation of pension funds. As well, opposition media have faced pressure, and even freedom of religion is threatened.
So it's tempting to welcome any rescue deal which might curb these abuses, and by extension to assume that the policies required by the EU and IMF will succeed. That assumption is dangerous and very possibly wrong.
Hungary faces an old-fashioned emerging markets crisis in which it can easily be swamped by its foreign currency debts. It is also sailing directly into a very deep European recession, something which will rapidly make its tenuous debt load all the more insupportable.
It is important, then, to separate what the EU and IMF want, much of which is for the good, from what those policies can achieve. Besides safeguards to central bank independence, the EU and IMF will very likely ask for changes in taxation and for plans that can credibly keep Hungary's deficit below the 3% level, something it has failed to do every year since 2004. In exchange, Hungary will get the US$10bil to US$15bil it needs to meet its refinancing calls in the next year.
The theory is, as it was with Greece, that this will restore market confidence and, with a little help from the global economy, by the time the year is up, things are looking rosier and Hungary can return to the market on reasonable borrowing terms.
Just as that didn't work for Greece, or Ireland which now needs another bailout, so it very likely won't work for Hungary either.
Hungary already faces competitiveness problems as economist Edward Hugh points out, while its unit labour costs were 30% cheaper than Germany's at the beginning of the last decade, they are now at least 10% higher. Its economy is highly dependent on exports to the eurozone.
And while a bout of forint weakness might help exports, it will make Hungary's debts even more untenable. Foreign-denominated government debt is now more than half the total and gross foreign debt is 140% of GDP, much of it Swiss franc-denominated mortgages.
That leaves the central bank raising rates to avoid a debt spiral, something that taken together with relative austerity and a European recession makes the situation 12 months out look very grim in prospect.
“If the solutions which are being promoted by the IMF and the EU Commission are based on a faulty or incomplete analysis of the situation, then the measures being promoted eventually won't work as they should, and this will lead to disappointment,” Hugh writes in his blog. “The political dynamics of what then happens is what should be concerning those who are able to think about such things. Could Hungary be the first example of a country that has lost hope and gone down the road of believing in demagogic politicians?”
It would be a sad irony if well-meant IMF and EU reforms end up discredited.