"The Hungarians made their own contribution", Dominique Strauss-Kahn, Interview with Népszabadság
January 13, 2009January 13, 2009
1. The IMF visit to Hungary will take place at an unexpectedly high level, given your presence. Does that imply that there are new developments, maybe unexpected difficulties to overcome with the Hungarian government? Who are you exactly meeting in Budapest?
A: On the contrary, since the announcement of the government's economic program in October, financial market conditions in Hungary have improved more quickly than we expected. The exchange rate has been broadly stable, government bond yields have declined, foreign parent banks have continued to support their subsidiaries in Hungary, and international reserves have increased.
Nevertheless, global financial markets remain under stress, so Hungary's external financing continues to be difficult and it would be wrong to become complacent. To help restore the confidence of global investors and minimize the depth of the economic downturn in Hungary, it is essential for the government to continue to carry out economic policies in line with the program.
During my visit, I will meet with Prime Minister Ferenc Gyurcsány, with the leader of Fidesz, Viktor Orbán, with Finance Minister János Veres, with members of Parliament's Economic and Budgetary Committee, and with central bank Governor András Simor.
2. Do you think that the government could have achieved better technical conditions during the negotiations on the IMF loan?
A: As for any IMF loan to a member country, we asked Hungary to develop a set of economic policies that addresses the country's key macroeconomic and financial challenges—government finances and the risk to the banking system from the economic downturn.
Against the background of the high level of government debt—the highest among the new EU member states, as a share of GDP—making sure that the government financing needs are met, including by cutting the budget deficit, is essential. And that is why the decline in the government deficit to 2.6 percent of GDP envisaged in the budget for 2009 is appropriate.
While the banking system is currently in a strong position, the economic downturn will weaken loan quality, and external funding is likely to remain tight. Therefore, I welcome the recently-enacted bank support law, which establishes capital enhancement and borrowing guarantee facilities that are similar to those available to banks in other EU countries.
3. In order to sign the stand-by arrangement with Hungary, did the IMF ask for specific prerequisites, such as a bailout to save the country's banking system? In the first place, did the Hungarian government come forward with specific commitments to be taken or did it just give way to IMF proposals? Who specified the scrapping of the extra-month pension to reduce public spending?
A: The program, including specific commitments, was developed by the Hungarian authorities, with general advice from the IMF, based on our experience with other countries. The Hungarian banking system is currently in a strong position, so it does not need a bailout. Specific measures to reduce government spending, including the cap on the 13th month pension, were developed by the Hungarian government. The cap on the 13th month pension ensures that low-income pensioners are protected.
4. The last installment will be due in 2010. Why exactly then, an election year in Hungary? What if the incoming government drastically changes economic policies?
A: IMF Stand-By Arrangements are intended to help member countries address short-term challenges, and 17 months is a fairly typical length. If economic problems persist longer than we currently expect, the Stand-By Arrangement can be extended. If the incoming government, after the 2010 elections, needs continued financial assistance, and develops economic policies that warrant such assistance, then we will do our best to help.
5. Recession times are not considered to be the best opportunity to reduce budget deficits. For example, the US is heading for a 10 percent deficit this year, while leading economists such as Paul Krugman or Jeffrey Sachs find even an 750 billion dollar stimulus package too small. Don't you think that insistence on beyond-capacity deficit reduction might, under the current macroeconomic circumstances, deepen recession, fuel deflation and eventually jeopardize loan returns as well?
A: Fiscal policy needs to support macroeconomic stability and ensure the sustainability of government debt. The government depends on investors' willingness to finance its deficit and to refinance debt that is falling due. Investors are only willing to finance the government if they think that the government will be able to meet its obligations in the future. Investor confidence has a high pay off in ensuring that financing will continue to be available to support growth.
6. The European Commission(EC) has for a long time called for Hungary's public finances to be put in order. Have you coordinated with Brussels in connection with the Stand-By Arrangement?
A: The IMF and the EC are coordinating closely in supporting Hungary's economic program. Both institutions are providing sizeable financial support: about 12.5 billion euro from the IMF and 6.5 billion euro from the EU. IMF and EC staff consult each other frequently, and conduct joint visits to Budapest.
7. After Ukraine, Iceland, Hungary and Pakistan, do you expect another round of countries to apply?
A. Providing financial support to countries hit by shocks to cushion their impact is a traditional responsibility of the Fund. The Fund has recently provided fast and very substantial support for the countries that you mention and, more recently, Latvia. We stand ready to respond quickly to other countries should they need our support.
8. As a consequence of the financial crisis, the framework of global finances is being redefined. What is the IMF's role in it? Does the organization you lead have sufficient leverage to control global financial processes rather than simply being the "family doctor" of individual countries and provide them "prescriptions"? How do you see the IMF in the future?
A. There is now universal recognition of the need for changes in financial market regulation. Open financial systems provide tremendous economic benefits, but they only work if there is good oversight. Much of this oversight and regulation will continue to be done at the national level. However, given the globalization of financial markets, there also needs to be greater international coordination. This means an important role for international organizations. The IMF has a special role in this process, because it brings to the table an assessment of the linkages between financial sector and financial market rules and macroeconomic outcomes, a critical factor for designing oversight and regulatory frameworks. It has near universal membership and it can provide the machinery for consultation and collaboration among its member countries.
The Fund is already closely working with other international institutions. Efforts are ongoing with the Financial Stability Forum (FSF) to step up cooperation in key areas such as early warning exercises and improving supervision and regulation of the financial sector. And the Fund is contributing to the working groups set up by the G-20 for developing proposals on a range of issues, including how to enhance sound regulation and strengthen transparency, reinforce international cooperation and promote the integrity of financial markets, and reform international financial institutions.