Peter Felcsuti: Orban government’s highly centralized approach makes entire system vulnerable to mistakes

May 15, 2014


Former Raiffeisen CEO and Hungarian Banking Association president Peter Felcsuti on the Orban government:

There is a very narrow circle, dominated primarily by Orban himself, whose ideas and preferences matter. That makes the whole thing terribly vulnerable and prone to mistakes. Obviously, the centralization helps decision-making and implementation. On the other hand, there is a clear danger when opinions of a wider circle of experts are excluded. Their opinions are not listened to, and not even being sought after. . . . This approach makes the entire system very vulnerable to mistakes. 

How did you get involved in finance?

I received my college education in Moscow. At that time we were assigned to study by central government authorities. People were sent abroad to study as part of a centrally organized project, as students were assigned to work for different government authorities. I happened to be assigned to the National Bank of Hungary. I studied International Economics at the Moscow Institute of International Relations.  Our curriculum consisted of English, sciences and other subjects that were considered important for us: international economics, international law, or other things. It was sort of preordained that I would come back to Hungary and start my career at the National Bank of Hungary.

How did you decide on finance?

I wasn’t the one who decided on finance. The only reason I took up finance was because I was assigned to the National Bank of Hungary. It is difficult to understand how these things worked because now we live in a completely different environment. How things worked and how things were managed back then may seem distant to those who didn’t grow up in that system.

In that society all major decisions were centralized. Very little was delegated to lower levels. For instance, sending young people abroad to continue their studies was part of a centrally managed plan. They would also decide how the knowledge and skills of these students should be utilized later on after they graduate.

I was told “After you finish your studies in Moscow you will receive a job at the National Bank of Hungary.” And that was how it went.
Did you come back to Hungary immediately after finishing your studies in 1973?

Yes, I came back to Hungary and went to work for the National Bank of Hungary just as it had been planned for me.  Some six years later I did go back to university and studied at what at that time was the Karl Marx University in Budapest, known today as Corvinus University. I had some post-graduate studies in finance, and I received a grade which was great for my professional career.  All the while I continued working in various areas of the Central Bank.

Originally, I was employed in the area which dealt with the so-called communist countries, or Comecon countries, specifically in the area dealing with the financial cooperation between these countries or other countries in the region. When I felt that I had exhausted my opportunities in that field, I asked to be transferred to the more exciting and demanded area which was tasked with working with the capitalist countries.

I spent a couple of years working in an area of the Central Bank that dealt with so-called developing countries, and then I was transferred – which was a big step forward for me – to the department which dealt with the fundraising activities of the Central Bank in the major capital markets. That opportunity was like the dream job lots of people shared when they started working at the Central Bank because it represented the peak of the professional activities one could achieve.

In comparison with other Soviet countries Hungary had a relatively relaxed type of communism referred to as “Goulash Communism”.

This played a huge role in the importance of Hungary’s ability to gain access to international fundraising. Unfortunately, the political elite in Hungary, whether communist or non-communist, always felt it important to provide the population with facilities and opportunities ordinarily beyond the means of the country. Hungary, after all, is a small and underdeveloped country. It didn’t, and doesn’t, have the means to provide the population with very high quality services. Hungary always needed external funding to satisfy the needs of the population. That kind of tension between the aspirations of the population on the one hand and the possibilities of the country on the other hand, has always existed, and it’s nothing new to Hungary.

What caused the conflict? How difficult was it to manage or find a balance between these two ideas?

It was something that was part of the political system. Hungary, as you said, had a Goulash Communist system. This means that Hungary had a more relaxed type of communism, a more relaxed autocracy than one would find in other similar countries, and the price of Goulash Communism had to be paid by external indebtedness.

This brings us back to fundraising. All of that needed to be funded. That higher standard of living needed to be financed. This was one of the functions of the Central Bank at that time. The Central Bank had to go to the capital markets and find the money, wherever it existed, to finance the gap between the needs and availabilities.

It must have been fascinating how communist countries harmonized internal policies at odds with the external markets.

It certainly must have been. But that wasn’t my job. My job was to find the money. I was still young at that time and was a relatively junior officer in the Central Bank, but that presented me with huge opportunities that helped me really learn my job. We did things that nobody else in Hungary was doing at that time, which was to be an actual counterparty to major international banks and capital markets. What we were doing was a very high privilege and very exclusive activity.

Where did you find yourself after the rendszerváltás?

If the rendszerváltás hadn’t happened, I probably wouldn’t have retired from the Central Bank. I had no intention of leaving because I enjoyed my job a great deal and I was moving up the ladder at a very decent pace. In 1989 I was a mid-level manager in a reasonably senior position. If we hadn’t had the political changes in Hungary in 1989, I would have gone on serving in the Central Bank and continued progressing through the ranks. I’m not trying to suggest that I would have become the President of the Central Bank, but I was very happy there and still had opportunities before me.

You had no intention to change jobs or move to a different organization?

I was very happy there. If I’m happy somewhere then I’m not dominated by the need to change, and that’s true for the second half of my career, too. I spent basically 21 years at Raiffeisen Bank. I was offered opportunities and jobs elsewhere, but I was happy at Raiffeisen and never felt the need to change.

So anyway 1989 came and that meant huge changes for the Central Bank itself, and those changes were not very favorable from the point of view of my career. Obviously, new areas were created, new high-level people came to work at the Central Bank, and I just felt I didn’t have the comfort and opportunities I had enjoyed before. I felt I needed to leave the Central Bank.  And so I left.

At that time I thought that I’d like to continue working in finance. The new exciting area in finance was in the commercial banking system which was then being created in Hungary. One of the hottest places to work at the time was with the local operations of Citibank. They had smart people there and they were looking for the best available talent in the marketplace. They made me a very nice offer which I couldn’t refuse.

Did you join Citibank as a CEO for their operations in Hungary?

They implied that I would be a very important person at the organization. But when I got there I realized that I wouldn’t be as important as I had expected previously. So, my love affair with Citibank only lasted six months. But during that six months I gained really good insight into how commercial banks really work. Looking back, I think I should have spent more time at Citibank and that probably would have a more significant impact on me in terms of being a more accomplished commercial banker. I think Citibank was an excellent place and served as an excellent school for people like me who had a fragmented knowledge of commercial banking because we were always on the other side of the table, which was the receiving side. We were always the customers to commercial banks because we represented the Central Bank. Clearly, it’s much more demanding and much more interesting to be the bank that offers the service.

Anyway, I received an offer from a very small consortium bank which, at the time, was one of the few small foreign-owned banks in Hungary. The Austrian Raiffeisen banking group was one of its shareholders, as was the Central Bank. They invited me to be the CEO of this small bank.

I joined the bank in October 1989 and retired from there in January 2010. I was CEO of the bank the entire time. That period represented the second half of my professional career. The first half, roughly 18 years, I had spent with the Central Bank. The second half, roughly 20-21 years, was spent in commercial banking.

I read your book Szerintem (In my opinion) and it left me thinking that the rendszerváltás must have been such an interesting time to be in Hungary.

Yes, I talk about it in my book. The rendszerváltás didn’t really happen for most Hungarians. The majority of Hungarians did not participate in it. It happened because world politics had evolved to that point. The Soviet Union collapsed and obviously the events which unfolded created huge opportunities for the political elite in the world. Countries like Hungary could avail themselves of this opportunity. But it wasn’t something the country fought for. It wasn’t something that the majority of the population was fighting to have. It just happened.

A lot of Hungarians think the rendszerváltás happened because Viktor Orban gave a speech at Heroes’ Square and told the Russians to leave.

Obviously, when the opportunity presented itself there were a lot of people who said, “Here’s the opportunity, let’s grab it!” But they never created the opportunity. For example, look at Romania, they had a revolution. Even in the then-Czechoslovakia there were mass demonstrations. There was an element of risk that those people faced. Even in East Germany there was some kind of a social movement to have something like a rendszerváltás.

As it happened, Hungary had been living under Goulash Communism. The Hungarians didn’t like it very much but grew accustomed to it. Even in the previous system, I was reasonably well paid, I could travel a lot, and I felt like I had an important job. The system wasn’t something that I was especially fond of, or something that I would go out of my way and take risks to keep. I guess the majority of the Hungarian people were like me. When the rendszerváltás happened because it had to happen a lot of people caught on to it.

The Hungarian people harbored lots of resentment and suppressed emotions regarding the sins of the communist system. When the rendszerváltás as an opportunity presented itself a lot of people felt that this was time to avail themselves of this opportunity. But the majority of the population just accepted the fact that, “Yes, we have the rendszerváltás. We will continue our lives.”

It’s important to realize that Hungarians were not able to just continue with their lives. Obviously, Hungary had a certain level of well-being during communist times. We didn’t have unemployment. And we didn’t have the kind of distressed population-related problems that we have now, for example, the problems faced by the Roma living in the countryside of Northeast Hungary. That kind of poverty didn’t really exist back then.

The Kadar regime was able to provide an equality among the poor. A very small minority of the population was able to enjoy a higher standard of living. But the rest of the population was simply getting by.

Because of the rendszerváltás capitalism in its wildest form suddenly descended on Hungary, meaning that the Eastern trade collapsed. Suddenly 25 percent of the means of production of the country became obsolete. Nobody wanted to buy the products that were coming out of Hungarian factories. Suddenly a huge number of people became unemployed. Especially in those areas which were affected most by the decline activity of big factories and heavy industry.

It also affected what we could call the middle class whose skills became obsolete overnight. In cases where people were able to retain their jobs, those jobs didn’t pay any more than before. Suddenly, a great deal of the people’s self esteem was lost.

Prior to all this, Hungarians looked upon themselves as people who do reasonably well compared to other countries in the region. That feeling suddenly evaporated when the rendszerváltás happened. I wouldn’t say that it was a very happy period. Maybe the politicians loved it, but the population didn’t like it much.

What was it like to be in commercial banking at the time?

Banking was an exception back then. Banking is important for the market economy. Bankers – especially those with a little knowledge of language, a little knowledge of how to behave at negotiating tables and dining tables, those who had exposure to what you could call international cooperation – suddenly became very valuable.

Foreigners, foreign bankers, and multinational companies who came to Hungary hired people with such talents for very decent wages. It was us who really benefited from the changes Hungary was undergoing, but the majority of the population wasn’t benefiting from these changes. Banking became very important in this country and key areas of banking were picked up by foreign investors.

There was no domestic source for the kind of capital that was needed to get things going for a transition economy taking its first steps.

How could there be? Compared to the Czech Republic and other similar countries, Hungary was a heavily indebted country.

In fact, there’s a huge resentment among Hungarians that this transition didn’t start with the West providing a Marshall Aid-type program in the region. There were illusions in Hungary that its debts would be forgiven, or, if not forgiven, then at least refinanced to make servicing the debt easier. That never happened.

Hungary had to privatize its economy and the government had to sell its assets in order to maintain the debt service. Because it was a fire-sale, the overall terms and conditions during the privatization were not terribly attractive for Hungary, especially when compared to Slovakia, the Czech Republic, and others who started the privatization process much later and under much better circumstances. So, that too was another source of resentment, and a legitimate one at that.

When you try to understand the Fidesz government today – the anti-foreign attitude that Fidesz has towards foreign investors, bankers and multinational groups – this is the source of that.  And there is a great deal of legitimacy here.

When you look at the today’s opposition, you’ll see its inefficiencies and the weaknesses are the result of it not really doing its homework in terms of rationally and objectively analyzing the whole development of the past twenty years.

168 ora published an article in which members of Hungary’s liberal establishment were asked to share their thoughts on what recent elections implied about Hungary. You mentioned this in your statement.

I find the opposition’s current position counterproductive and intellectually very weak. All they do is just lambast Fidesz, calling it “backward”, “retrograde”, “xenophobic”, “ruinous” which is all true by the way, but that’s only half of the truth.

There is a great deal of rational criticism of how capitalism has evolved in Hungary over the past twenty-something years. Without understanding that, without admitting or recognizing where Fidesz is right, the opposition will never be credible because the population harbors the same feelings and resentments. Although sometimes uneducated and uninformed, those resentments are essentially right. That’s the problem that the opposition hasn’t been able to overcome.

The opposition needs to give a decent and credible answer to what went wrong in the past 25 years.
Raiffeisen was only one of many foreign-owned commercial banks to spring up in Hungary after the rendszerváltás.

This is neither surprising nor unique. If you look at Hungary’s peer countries you see the same kind of ownership structure. You see 80-85 percent foreign ownership. In the Czech Republic, in Slovakia, in Poland, so it’s nothing new.

In Hungary we have this politically motivated tax on banking and a mentality that “the foreign bankers did all this to us”, and somehow the point is missed that the same foreign banking groups are active in our neighboring countries. How is it that the foreign banking groups didn’t ruin those economies? Why do they consider this argument valid for Hungary but not for our neighbors?

Eventually, you arrive at the point where you realize that it’s not the ownership structure of the banks that really matters. You realize that you need to compare the economic and social policy that Hungary has been pursuing over the last 25 years, which has been vastly different from what was pursued by Slovakia or in the Czech Republic.

In the early to mid-1990’s Hungary’s financial situation became very weak and vulnerable, and by the mid-90’s the economy was on the verge of collapse. In 1995 Lajos Bokros was appointed Finance Minister. The “Bokros Package” ushered in structural reforms, austerity measures, and the privatization of state assets. Despite the unpopular reforms, Hungary’s GDP grew annually by 4 or 5 percent for several years. Foreign direct investment picked up and the economy was on the path of growth until 2001-2002.

During the first three years of the first Fidesz government which lasted from 1998-2002, the government capitalized on the austerity measures and privatization that Mr. Bokros had introduced earlier. Foreign equity capital continued to pour into the country and there was a reasonably favorable environment surrounding the economy. The European Union and world economy was in reasonably good shape. All this contributed to a reasonably satisfactory rate of growth in annual GDP.

The thinking was that Hungary has a budget that is balanced, it has a debt that has been reduced to a manageable level, it has a reasonably satisfactory rate of growth, it is on the right track, and everything is just fine. But that’s when another factor entered the equation, a factor that cannot be ignored: political competition inside the political arena.

Then we had an election in 2002.  It was extremely sharp and carried out in extremely bad taste. From then on the political elite, in its fight for power, whether in opposition or in government, started adopting extremely populist policies. They wanted to retain or acquire power at any cost.  And it so happened that the Socialist and liberal coalition government that came to power at that time introduced an extremely loose macroeconomic policy designed to boost private consumption in every possible way. By the way, the first such step was actually done under the Fidesz government in 2001, but it was continued by the Socialist-Liberal government.

In boosting private consumption they really, shall we say, pushed for consumption when it was still unearned. To bring forward consumption that is not yet earned all you need is bank credit, and that is why the banks really thrived. It didn’t only consist of mortgages, it extended into all kinds of consumer loans, car leasing, and what have you

We had similar policies in the United States with subprime or variable rate mortgages. The idea that “everyone should own a house, a home they can call their own” was aggressively pushed by the decision makers. The government worked with the banking sector and encouraged them to secure the financing for such things. Was there any specific move on behalf of the government to establish some kind of informal agreement with the banks to start giving out loans for these purposes?

No, there wasn’t any need for that. The commercial banks, which were mostly foreign-owned, were extremely liquid and there was plenty of money. The banks were happy to apply that liquidity in a place that seemed like a very good place to invest in and Hungary seemed like a very good place to invest. We didn’t have any funding problem. The money used by the banks had poured into the country with the help of our parent institutions, so we didn’t need any encouragement from the side of the government.

What ended up happening was something that resulted from momentum continuously building up. At first banks are relatively risk averse, conservative, and selective in picking their customers. But when competition picks up, momentum begins to build.

I remember in budget meetings with my owners they would ask, “Why aren’t you growing at the same rate as Erste?” I would say, “Well, because this is the way that we grow.” They would respond, “Well, you have to be at least as good as Erste.” That could be achieved by loosening credit standards, involving intermediaries who bring you customers that are not of the highest quality, etc.

The competitive element introduces a sort of self-consuming process, not just for Raiffeisen, but for everyone else, too. What happened is very well described in financial theory. It’s called “Minsky’s Theory”, named after the American economist Hyman Minsky. Essentially, the banking industry loosens credit standards out of greed and competition until it finally reaches a point of unsustainability. This is basically what happened in Hungary.

What’s important to note is that this did not happen in Slovakia, even though Raiffeisen, Erste, and other banks, are just as active in Slovakia, Czech Republic, Poland, etc.

Why is it that this never happened in Slovakia and those countries? Obviously, the incentives must have been different in those other countries. Clearly, a feature that is important to this story is that the financing provided in Hungary at that time was in the form of foreign currency.

People took out these foreign currency exchange-denominated loans which were pegged to the exchange rate of the Euro or Swiss Franc. So if the Euro or Franc strengthens against the Forint, or the Forint weakens, the people holding these loans pay more.

Yes, but you should also note that people were losing their jobs. They no longer had income. There are two major reasons contributing to the defaults on these loans: first, the appreciation of the Swiss Franc; secondly, the loss of income.

If people lose their jobs they obviously won’t have income to service their debts. According to studies which analyze the root cause of the problem, the second reason played a more important role than the first.

The 2008-2009 crisis hits, a lot of these loans became non-performing loans, people were defaulting. The banks took a pretty big loss.

Which is quite normal.

Unlike in the United States, where the Fed played an instrumental role in helping to bail out banks on the verge of collapse at the start of the crisis, the Hungarian Central Bank did not offer to bail out any of commercial banks in Hungary.

They didn’t. First of all, the banks are foreign owned and not all of the banks had to be bailed out by the governments of the respective countries. In the case of Raiffeisen Bank, we had made a hell of a lot of money in our first 16 years of operation up until the 2005 to 2008 period, and we had paid lots of dividends, and part of the money we made also went into our retained earnings.

Just to give you an idea, when I took over the bank in 1989 the equity capital of the bank was HUF 2 billion. Twenty years later in 2010, the equity capital of the bank was HUF 180 billion and we had paid a lot of dividends and never received a capital increase from the owners.

Now, if you take a relatively long period of time like twenty years and you suddenly take an HUF 140 billion loss – Raiffeisen never did, I’m just using this to illustrate – then you have to write that down against the HUF 180 billion that you had made previously. So if you do receive a capital injection from your parents, as happened multiple times in the case of Raiffeisen, the first 18 years cannot be ignored. But obviously the situation is more complex than that because part of the losses were incurred as a sort-of “late payment” for the profits we earned earlier.  But a huge part of the losses we incurred were inflicted by the government.

Between 2008 and 2010 Raiffeisen had relatively small losses.  I recognize that some of those losses might have continued in the next decade. What made the whole thing unsustainable and intolerable was the government’s intervention after 2010.

They actually made laws and legislation that inflicted huge losses on the banking sector, and some of these losses are unjustifiable in business or in legal terms. Among these was the early repayment scheme it imposed which only people with means could avail themselves of, specifically those who were less in need of support from the government. Whereas people who didn’t have the means, but who were in need of support, couldn’t benefit from the early repayment scheme because they didn’t have the money to begin with. Ever since then, the government continued to increase these actions with a number of other interventions and these losses grew.

We discussed two reasons contributing to the non-performance of hard currency loans: exchange rate volatility and the loss of jobs.

The latter of these problems continued well beyond the 2010 period. Less people have jobs and wages aren’t rising. Commercial banks are not lending like before for a number of reasons, including, stricter standards for evaluating clients and a low growth environment. In addition to this, sectoral taxes brought by the government add to the banks’ burden. How would you explain what appear to be penalistic measures introduced by the government against commercial banks in Hungary?

We don’t call them penalties. We call them “super taxes” or “extraordinary taxes”. Clearly, the political motivation is to penalize and provide a source of easy revenue for the government. Banks are having a hard time because their business is the local economy. They are heavily invested in Hungary. Basically, a bank cannot be in a position to leave unless they have a buyer. But who would buy a bank for what price if Hungary’s government has the kind of policies that it has? In a way, Hungary’s commercial banks are being held hostage to the government’s policies.

How are banks making money?

Right now the Hungarian banking industry is more or less divided into two.

First, you have banks which are the more profitable banks who were more cautious and didn’t become overly obsessed with the competition, such as Budapest Bank; and there are banks that absorbed their losses earlier on like K&H Bank, who had huge losses in 2005 and 2006 but started to clean its business up before the crisis came.

The second type consists of the more aggressive banks like Erste, CIB, and Raiffeisen.

There are profitable banks in Hungary, but they are not profitable in terms of an expected profit – or risk-adjusted profit. They make some money and some profits.  But considering the risks they have as expressed by the CDS for the countries of Hungary I don’t think they are very happy with the profit they have, but nominally speaking they are making money. But then you also have loss-makers like Raiffeisen.

The common thing uniting them is that neither of the groups is very active in lending. Even though some of the banks are able to make some profits and some of the banks are making losses, the banking sector as a whole is very passive. It’s in a sort of a zombie state.

You write about the zombie banks in your book. Explain what a zombie bank is?

Some of this is simple theory. This is how banks work in a crisis situation. Banks have become very passive as a reaction to the crisis, partly because of risk perception, partly because of losses and provisions they need to create. You have similar problems in other European countries like the UK. At least part of the problem of zombie banks comes from the simple fact that this is how banks work, they are pro-cyclical.

Another part of the zombie-like quality of Hungarian banks comes from the fact that Hungary is especially unattractive right now. So the risk-reward expectations are not compatible with those held by foreign owners, whose Hungarian subsidiaries would disagree because they want to grow. This is partly because the owners must manage a much larger picture and Hungary represents only one small part of that larger picture, and partly because they dislike the Hungarian risk-reward situation. These factors result in a Zombie situation and means that the Hungarian banking industry doesn’t fulfill its social function.

You joined Together-2014 in 2012. How did that happen?

I started talking with (party chairman Gordon) Bajnai in 2011, Together 2014 was created in 2012, and I quit the party in 2013.

Hungary’s opposition parties were incredibly divided going into the 2014 elections.

But it has always been like that, and one Hungary’s features is that it is a very strongly divided country.

And that was proven in this last election. There was something of a movement on behalf of opposition parties on the left to form a coalition to oust Fidesz in the 2014 elections.

First of all, the huge electoral success of Fidesz in 2010 (because it was huge, unprecedented basically in modern democracies) was a reaction to the crisis, and was a huge criticism of the performance of the traditionally pro-capitalist parties in Hungary, such as the Socialists and the liberals. But the 2010 election was also a legacy of the Kadar regime, which was a manifestation of the funny expectations the Hungarian population has generally had about capitalism. There were several reasons why Fidesz was able to win the 2010 elections with such a huge majority.

Personally, I feel that, in spite of the rational undercurrents of Fidesz’s policies (because some of which are rational) they have found the right way to identify the problems of Hungarian society. But identifying is only one thing.  Providing solutions is something entirely different. The solutions Fidesz has provided are absolutely tragic as far as the country and its future is concerned.

Returning to my involvement in Together, it was perfectly reasonable for people like me to stand up against this and try to do something to change this.

Have you ever had political ambitions?

No. I knew Mr Bajnai from back when he was in the private sector, and he was a customer of the bank. We had known each other for quite some time, going back 10 or 15 years. We enjoyed a cordial relationship. I wouldn’t call it friendly, but it certainly was, and remains, a cordial relationship. He sought me out and I felt that he might be the person who could lead this opposition against Mr. Orban’s regime.

I always made it clear that, because Mr. Bajnai’s movement is not strong enough to make Bajnai the leader of this opposition group, he will need to establish his priorities. Is his priority to create a medium-sized party and be in parliament, or is his main priority to topple Mr. Orban?

I made it very clear that my priority is to topple Mr. Orban. I don’t care about medium-sized parties in the Hungarian parliament. In August 2013 there was an important moment when Mr. Bajnai had to make an important decision regarding which priority to pursue: to continue building himself a medium-sized party, or to submit this important priority to an even more important priority, which is the creation of a unity among opposition parties which could successfully challenge Mr. Orban.

Mr. Bajnai chose the first option. I told him that this is not something I could go along with.

You didn’t come out and criticize him for this.

No, I didn’t. But that’s what normally happens in Hungary. People work with others until something happens and then they go out and start bad-mouthing each other. I felt that if I were to do something like that I would be harming the cause. He doesn’t need another critic in the press. I told him I wouldn’t make appeals to the press, but that I wouldn’t deny it to anyone if I was asked about this.

A couple of months later I was on television and the host asked me about Together. I had to let him know that I was no longer a part of it.

I saw that interview. You didn’t give any reason for anyone to doubt your reasons for leaving the party.

And I still believe that Bajnai is probably the best person to lead Hungary.

But alone, he didn’t have what it would have taken to win the election itself.

No. In fact, he thoroughly underperformed as a politician.

It was a terrible campaign.

I certainly expected much better of him. But I continue to believe that as a person, as an economist, as a political personality, he’s probably the best material we have in Hungary.  And that says a lot about the choices we have right now.

How do you see the “war on foreign-owned banks” playing out in the coming years?

It’s probably going to be less sharp than before because there was a lot of political motivation for the hostility before the elections. I still think they’re committed to the idea of having more so-called Hungarian-owned banks and they will continue to do things to make that happen.

What is your take on what happened with Takarekbank?

Things are never really black and white. It’s the same when I said that Fidesz is generally good at identifying issues and very bad at offering solutions to issues. The same is also true of Takarekbank.

The credit cooperatives in Hungary are not terribly important to the country, unlike those in the countries of Austria, Germany, or other places. They’re especially not that important when it comes to financing the rural population and the small- and medium-sized companies in the countryside. It would be good for the economy if the cooperatives played a bigger role in the economy. I agree with that statement without reservations.

Fidesz says this is what the sector looks like and it needs to be changed to make it more meaningful, on the other hand when it comes to actual implementation of that proposition it’s quite obviously awful.

The shareholders of Takarekbank were deprived of their rights. There was clearly a buyer in the background who would take over Takarekbank at a later point in time. The whole thing perfectly represented how Fidesz does business in Hungary: untransparent, not according to the rule of law, not respecting property rights, with general intolerance, and hastily rushing things.

The World Bank, OECD, IMF, and numerous other organizations have raised concerns.

My forecast for Hungary is this: I believe because Fidesz has this kind of approach to the economy and its participants, the overall environment is one that keeps people from being active. They’re afraid to invest, and participate in other ways. That is bad for economic development. If Hungary were an isolated country, it might even collapse at any moment because economic growth will not be sufficient enough to maintain services. The reason why I don’t think this is going to happen is because Hungary is a member of the European Union. The EU fiscal transfers are huge.

Hungary’s a net beneficiary of the EU fiscal transfers.

Absolutely. That money is very good for Hungary. It provides a stabilizing factor in the Hungarian economy. That being said, our economic performance potential is very weak, but it’s all underpinned by the European fiscal transfers–weak performance held up by the EU’s fiscal transfers. The outcome is stagnation, low growth. Nothing is happening. In the meanwhile our peer countries might move up and away from Hungary because of an accelerated speed growth. Hungary is in for a relatively protracted period of stagnation.

Lajos Bokros calls EU fiscal transfers the primary life vest of the Hungarian economy. When I asked him about the Central Bank’s new two week bond scheme, he told me (Central Bank governer Gyorgy) Matolcsy should know that his plan won’t be that significant and that it may imply that there is a target exchange rate for the Forint.

I think the decision of the Central Bank is something you can have a professional debate about. It’s not something you could say is lunacy or unheard of. There is a reason why they are choosing what they’re doing. But clearly there is a price that has to be paid because nothing is free in the economy. If you want to achieve something, you have to give up something most of the time.

Generally speaking, monetary policy is not that important. In macroeconomics you can look at something like fiscal policy, and when you compare the two you see that fiscal policy is much more important than monetary policy.

The Central Bank is hugely overrated in Hungary. It’s not that important. Clearly, it’s important and people are watching and listening to what the Central Bank is doing. But to suggest that this two week bond thing is going to bring about vast changes in the performance of the Hungarian economy is certainly not true.

What are your thoughts about Matolcsy as a central banker?

To suggest that he is a lunatic wouldn’t be fair. He has a view which is basically very critical of the neoliberal economic school. It’s very Keynesian. He doesn’t believe in the market and he believes much more in the government that guides or directs the market. I’ll say that much about him. These are things that can be said within the frame of academic debate.

What’s his professional background? Does he have any experience in banking? Has he ever held a job for a private enterprise profit-oriented company?

No, but that’s not a novelty in Hungarian politics. If you look at the whole Fidesz party, you’ll see that nobody ever had a real job. Orban never had a job. None of these people have ever had a job. So this isn’t something that would come as a novelty or a distinguishing feature of Matolcsy.

Do you think there’s a danger to people who have never had experience in the private sector having the authority to dictate economic policy?

Technically speaking, these politicians involve experts with experience in the private sector to help carrying out of their policies. So you can say that the experience is there.

I think the bigger danger is that the entire thing is a very highly centralized system. There is a very narrow circle, dominated primarily by Orban himself, whose ideas and preferences matter. That makes the whole thing terribly vulnerable and prone to mistakes. Obviously, the centralization helps decision-making and implementation. On the other hand, there is a clear danger when opinions of a wider circle of experts are excluded. Their opinions are not listened to, and not even being sought after. I’m not referring to me, I don’t want to be consulted by Orban. I’m referring to experts who are excellent professionals in the economic field and are more right-leaning than I am. I could give you the names of five or six such economists that I myself have a great deal of respect for. These economists aren’t even being involved on a consultation level. This approach makes the entire system very vulnerable to mistakes.