While the media in general are paying far more attention to Greece and its determination to play by the rules and thus win back market respect, Hungarian maverick Viktor Orban takes the opposite view. He may well represent a far bigger threat to the shibboleths of our current form of capitalism…and if he does, he gets my vote.
Orban’s electoral success hasn’t diverted the IMF’s Christine Largarde from her most recent (and typically pompous) threat: “The IMF will need to see tangible steps that show the [Hungarian] authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability” she intoned. And on top of this, the EU has decided to get heavy by suing the Hungarian Government: it started up three legal cases yesterday against the Hungarians, trying to overturn laws passed which, it says, threaten the independence of key government institutions. The EU’s version of Lagarde-bluster Jose Manuel Barroso sounded an equally bullying tone: “The commission is determined to take any legal steps necessary to ensure that the compatibility with European Union law is maintained,” he told nobody in particular. Very few people care a monkey’s what Barroso thinks any more.
Several columnists over the last week have also written ominously about Hungary being ‘left to the free market wolves’ if it doesn’t come to heel. But in a way, this latest EU mess (Hungary isn’t in the eurozone) could well act as a fascinating – not to say myth-busting – test case if Mr Orban plays his cards well. For the two things about to be tested are first, what exactly can the EU do to stop the Hungarian Government in real terms; and second, how ghastly would the fate of being left to the wolves really be?
How much power does Brussels really have?
First, the EU. Surprise surprise, Brussels isn’t that bothered about individual liberty: Orban’s alleged ‘controlling’ laws are ignored in favour of three key pieces of legislation: one diluting the powers of Hungary’s central bank president Andras Simor; another lowering the retirement age for judges and prosecutors from 70 from 62; and a third replacing the head of Hungary’s data-protection authority.
No doubt the EU Commission took copious notes on these ideas. Hysterically, the eurocrat objection to lowering judicial retirement ages is that it ‘contravenes EU antidiscrimination laws’. In fact, Orban has done it to weed out all the ageing Communists from Soviet days who had been blocking reform. But when it comes to control of data and the munneeee, that’s where Brussels gets really sensitive: somebody else but us having investigative or financial powers? How very dare they.
Unfortunately for the Sprouts, yet again they may be hoist by their own petard. The very legal-heavy structure they created means the Hungarians could run the Commission round in circles for years: without action in response from the Orban regime, the European Court of Justice—the EU’s highest court—will be used by Brussels to adjudicate. Anyone who has ever appealed to this Mad Hatter’s Tea Party will know that the Third Millennium celebrations may well be looming before it makes a decision. After that – even if the ECJ finds Hungary in breach of EU Law – it’s hard to see what the EU or the IMF could do about it apart from withhold funds.
If funds were withheld, Hungary would have no alternative but to default in fairly short order.
What does the history of sovereign defaults teach us?
The best-remembered defaults are those after wars and revolutions: Russia and Germany in 1917-19, China in 1949, Russia again in 1998. But the key thing to note is that these are atypical: almost all sovereign defaults are the result of changes in the directional and quantitative flow of loans compared to previously.
According to useconomy.com, we can distinguish eight ‘lending booms’ since the early nineteenth century:
(1) in the early 1820s, to the newly independent Latin American countries and some European countries; (2) in the 1830s, to the United States, Spain, and Portugal; (3) from the 1860s to the mid-1870s, to Latin America, theUnited States, European countries, the Ottoman Empire, and Egypt; (4) in the mid- to late 1880s, to the United States, Australia, and Latin America; (5) in the decade prior to World War I, to Canada, Australia,South Africa, Russia, the Ottoman Empire, the Balkan countries, and some Latin American countries; (6) in the 1920s, to Germany, Japan, Australia, Canada, Argentina, Brazil, and Cuba; (7) in the 1970s, to Latin America, Spain, Yugoslavia, Romania, Poland, Turkey, Egypt, and Indonesia, as well as some African countries; (8) in the 1990s, to Latin America, emerging Asia, and former Communist countries in eastern Europe….including Russia itself.
Now here’s the killer statistic: All lending booms so far have ended in busts in which some of the sovereign beneﬁciaries defaulted.
Just over ten years ago, a dramatic change in the level and cost of banking loans from the US began. Shortly after that, the euro was born, and its central bank (the ECB) began a whole new package and direction of cheap loans to 27 countries. Those events alone probably ensured that what we are experiencing now was inevitable from the moment it started. But the historical point to take on board is this: should the EU (and the global economy in general) survive the current crisis without a single default, this would be a first in modern history. Given that the size and dual nature of this latest capital flow change is way beyond anything seen on such a scale before, I venture to suggest that somebody, somewhere is going to default bigtime. Most likely is that there will be several such ‘victims’.
It would be nice to think that the banking business had learned something from this history, but clearly it hasn’t. However, what did it do on the 37 other occasions in recent times when the sovereign borrowers went belly-up?
The short answer is, nothing much. Starting pretty much soon after its 1998 default for example, Russia (a marginally bigger player than either Greece or Hungary) began a decade of unparalleled economic growth. Nearly a decade after Argentina defaulted owing $81 billion, disgruntled creditors are still chasing their money. The litigation, and Argentina’s defiance in the face of judgments against it, complicate its plans to return to international capital markets, but how is the economy doing?
While Argentina still has few financial ties with the world and very little bank credit, contrary to repeated forecasts of doom from orthodox economists, the economy is roaring ahead. Although hit by post-Lehmanism in 2009, when the economy contracted by 2-2.5%, independent economists believe the economy there grew over 6% in 2010. Tax revenues are rising steeply, and reserves have climbed to $50 billion, thanks to a healthy trade surplus….despite the steady flight of capital from Argentina. Since the 2002 default, Argentine GDP has grown by 79.5%
Is there evidence here that leaving ‘The System’ through force majeur can also be a good thing? Maybe: I am not suggesting that Argentina represents the best-balanced economy in the known Universe. Far from it: there too the central bank has been plundered, and votes bought with crazy expansionist expenditure….more Erdoganomics.
But that’s not the point I’m trying to illustrate. My thesis is that there is life after telling the IMF, the EU and Uncle Tom Goldman to get stuffed. And this is not something a credit-driven version of capitalism wants people to discover.
Time to draw some conclusions.
There is prima facie evidence presented here to suggest that what is at stake in the seemingly never-ending EU-contagion-global-collapse scenario is not real damage to citizens, social structures or even sovereign success as a trading concern. Rather, the game is one of globalophiles and banking firms terrifying the crap out of everyone such that a precedent is not set: ‘there must be no forgiveness, no welching, and no deviation – otherwise they will see that chicken-licken was wrong’.
The two shibboleths being tested right now are absolute EU power demands obedience; and absolute lender/bondholder power demands repayment. Only a fate consisting of one’s jugular being torn out by wolves awaits those who disobey these diktats.
I would submit that, far from supporting those assertions, history suggests very strongly that they are complete bunk. Perhaps even Henry Ford himself might have delighted in that conclusion.