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Capital Markets

Hungary’s Marxist economist and central banker, Janos Fekete

An interview with the deputy president of the Hungarian National Bank.

By Padraic Fallon

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IN ADDITION        


“The unsettled monetary situation has considerably sharpened the political, economic and social contradictions which have their roots in the nature of capitalist society. It is therefore a distinct possibility that the capitalist world will face an economic crisis in the 18 months ahead ... While such a crisis would not last as long, nor be as grave as the one in the years 1929-33, nevertheless it would tend to become much more serious than the so-called recessions after World War Two."

So wrote the Hungarian central banker and Marxist economist, Janos Fekete, in June 1974, the month of the Herstatt collapse. In October 1971, two months before the Smithsonian agreement, he told a conference in Vienna: "The history of over a decade of unsuccessful attempts to eliminate US payments deficits leads to the inescapable conclusion: the dollar is overvalued and the devaluation of the dollar – provided one intends to place monetary reform on a sound footing – is thus unavoidable."

Today, Fekete believes that capitalism faces another crisis, but, while he is respected as an economist, international bankers know him as a financial conservative who is receptive to new financing opportunities. Fekete, with perhaps more forthrightness than modesty, illustrates these traits by recounting how Hungary issued a novel type of redeemable CD in the Middle East, while in virtually the same breath he points out that Hungary does not accept trade credits but pays for everything in cash. ("You will never find a Hungarian bill on the market").

Fekete, bespectacled and ebullient, is deputy president of the Hungarian National Bank. As such he is one of a team responsible for Hungary's external financing and foreign exchange activities. At the age of 58 he is probably regarded more highly than any other East European central banker, a fact that is perhaps reflected in Hungary's ability to borrow at a spread of 1⅛ % over five years.

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Sitting in his spacious office in the Hungarian National Bank's headquarters in Budapest, Fekete gives the impression of being far more anxious to discuss the problems of capitalism than those of socialism. He reacts quickly to a suggestion that spreads are rising for East bloc members, insisting: "I know what my own conditions are, and I can tell you that they are improving. Last year I had a better spread than I had the year before. This year I am negotiating a new one which will be better than the last."

The spreads on Hungary's loans bear him out. Fekete has just completed a $150 million loan over five years at a spread of 1⅛%, which compares very favourably with the spread of 1¼% on the $200 million loan for the international Bank for Economic Co-operation, still in syndication when Euromoney went to press. Hungary's payments deficit with the West is narrowing at a surprising rate, but that $150 million may not be sufficient for the country's needs, although projected borrowings of $250 million to cover the 1977 deficit now appear too high. The difference could just be financed through another redeemable CD issue in the Middle East.

Then the conservative Fekete emerges. "We will not take trade credits. I believe that we get better rates by borrowing direct from the banks and by paying for our imports in cash."

Fekete stresses his willingness to provide banks with necessary information. "We give a lot of details in the placing memoranda. We give so much information that our partners (the banks) are always satisfied. I am ready to give all the information that is necessary to judge whether the credit is good or not. Just look at our placing memoranda: you'll see that they contain a lot of information about the Hungarian economic situation."

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Hungarian policy on foreign credits is, he says, "based on the principle that we are financing investments, not consumption, on borrowed money." This is made clear in the placing memorandum, he insists. "The main conditions of making these investments is that they have to produce goods that we can sell anywhere, particularly in the West."

Fekete explains: "We have an investment programme which specifies how much equipment should be imported from the West, how much from other socialist countries, how much we can manufacture ourselves and so on. The Government has embodied these investments in the five-year plan, and they total 45 billion forints, which is about $1.1 billion. But when the National Bank allocates credits in turn to the Hungarian companies, the companies must put forward a set of proposals which have to be approved before the funds are allocated."

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In general, however, state enterprises are more independent in Hungary than they used to be. Since the economic reforms of 1968, Hungary has switched to a centrally controlled economy which is regulated by the market mechanism, thus escaping the rigidities associated with too much central planning. "The greatest achievement of the reform is that it has created virtual economic autonomy for state enterprises" wrote Gabor Revesz in The New Economic Systems of Eastern Europe (C. Hurst & Co, London, £9·50). "Since the reform, the current activity of enterprises is not affected by any plan indicator, save for so-called recommendations which ensure the fulfilment of inter-state agreements mainly within the scope of Comecon relations, the majority in any case being advantageous and profitable, and consequently representing no compulsion on the enterprises.”

"When we borrow, we tell the banks what kind of investments we have in mind," Fekete explains. “The Hungarian companies give an obligation if they get the credit that they will increase their export capacity to the extent that, over the life of the loan, they will produce sufficient exports to cover the credits that we take from abroad. But from there on it is up to the company: once it has been given the credit it can use it anywhere – East or West – to buy the equipment that is necessary to increase production."

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The export push has, by and large, been successful in comparison with Hungary's colleagues in the East bloc – the Council for Mutual Economic Assistance, or CMEA. (Pronounced Smaya). The aggregate of exports and imports now accounts for two-fifths or so of Hungary's net national product, and Hungary has succeeded in relating western prices to its own domestic price level. The country's deficit with the West is expected to fall sharply, although that, in Fekete's words is dependent to a certain extent on the harvest. "Our plans are based on an average harvest, not a big one, not a small one. If we have a good harvest it means that the financing load is less than we had planned for. This year, for instance, we have had a very good wheat harvest, though cereals as a whole are only medium. Similarly, our energy requirements are based on an average winter temperature. If we have a warm winter that also eases the financing load."

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Later, as we drove over the Danube together in Fekete's black limousine, the central banker gestured through the snow towards the row of bright lights along the river and said:. "These lights were on, our offices were heated and our factories working while the people at our bank in London were working by candlelight during the energy crisis. We never have energy problems." Hungary gets its oil and coal requirements from with in CMEA.

Compared with other CMEA members, Hungary has made a success of its investment programme, a success that can probably be attributed to the 1968 reforms which revolutionized the amount of autonomy given to state enterprises. Hungarian state companies provide nearly 40% of all gross fixed investment through retained profits and depreciation. "It was a guiding principle of the reform that enterprises should have much greater scope for their own investment decisions, for it was envisaged that the representative enterprise should have within its own competence enough capital funds to replace depreciated fixed assets, systematically to modernize equipment, and flexibly adjust its capacity to changing market demands," wrote Revesz. "In addition, the guiding principles have provided for the development of a medium and long-term banking and credit system at the disposition of enterprises for them to finance those major enterprise investments which promised to be sufficiently profitable."

The vast majority of the investment programme will be financed internally, hence Hungary's relatively unborrowed situation. "I will never take a credit on a higher spread than is justified because we are not in a hurry," says Fekete. "If we do not get funds on conditions that we consider to be right, then the investment that is dependent on borrowed foreign funds will not be made. Our total investment over the five-year plan is 870 billion forints. Of this, 830 billion forints will be provided from our own internal resources, and 45 billion forints, or £1.1 billion will be borrowed on behalf of firms that improve their export capacity. But if we do not get the funds we need at the right conditions, then we shall invest not 870 billion forints, but 825 billion forints." Fekete insists that Hungary will borrow "only on Triple A conditions." Judging by the spread of 1¼% on the latest credit, he is not exaggerating.

Fekete's insistence on taking purely financial credits at the best rates implies that a comparison of Hungary's foreign debts with those of other CMEA members can be very misleading. Fekete, however, would not comment on suggestions in banking circles that some CMEA members are too highly leveraged. "You must put this question to the other members" he replied. "But I see that all countries in CMEA are taking credits on very good conditions. Banks have been very happy to lend to them, which indicates that the banks have judged the risk well."

On aggregate, however, he insists that the CMEA bloc is very underborrowed. "If you take the economic potential of these countries, their debts are ridiculously low. Most of these comments are simply not based on facts. Look at the Soviet Union: in a year, it is producing 480 million tons of petrol, it is producing about 300 billion cubic metres of gas, and 700 million tons of coal. It is an enormously strong economy. The banks know this, and they know enough to ignore most of these newspaper stories about Soviet debts."

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A debt-servicing ratio is not Fekete's yardstick. "My principle is that if a country takes a credit and invests it well, producing goods that are necessary to the market, goods that can be sold easily at the right price, then that credit is a well-covered credit.

"We don't rely on ratios; we look at investment performance. If we take a credit for a fertilizer plant which enables that plant to increase its production by an amount that is more than sufficient to cover the repayment – that's my criterion."

Fekete complains of a bias in western estimates of CMEA debts. An example: "Years ago we took a credit for the Hungarian aluminium industry. Since then our aluminium output has doubled, and we have repaid the loan in full. Now everybody has carefully noted the fact that we had taken this credit, but nobody has noted the fact that we have repaid it.”

 

Why not New York?

You were the first member of CMEA to take a rollover Eurocredit, and Hungary stands out among the CMEA countries for the sophistication and diversity of its borrowing methods. Have you considered borrowing on the New York markets?

We are very satisfied with London, Frankfurt and Zurich (and the Middle East) as sources of funds. We have minor problems to settle mutually with America before we could consider borrowing in New York.

What kind of problems?

They relate to pre-World War One credits. We have settled almost all American claims against Hungary, but we have some small items that are still open. We will not go to the New York markets until those are settled. We are working on those items.

But once those are settled, will you then go to the New York markets?

If these questions are settled, and if the conditions are right, then we will certainly consider it. We are not discriminating against New York, but we are not in a hurry.



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