Fortress Hungary

Orbán Profits from the Refugees

By Jan Puhl

Photo Gallery: Hardline Hungary

In many respects, Hungarian Prime Minister Viktor Orbán has emerged as the political victor in the refugee crisis. Voters support his hardline stance and other Eastern European countries are following his suit.

On Monday, Hungary closed the last remaining hole in the 175-kilometer (109 mile) fence it has been built along the southern border to Serbia, one of the final stations on the Western Balkan route to Europe that has been the focal point in recent days of tens of thousands of refugees making their way from Syria, Iraq, Afghanistan and North Africa. On Tuesday, a new law went into effect in Hungary making illegal border crossings an offense punishable by up to three years in jail. The developments came as Germany and Austria both imposed border controls to stem the massive influx of refugees on the final leg of the path to Western Europe.

Hungary's closure of its border with Serbia has led to confusion and desperation among refugees who had hoped to cross into Europe there. For the moment, nobody is being let through at all and Hungary has declared a state of emergency in two counties bordering Serbia to allow for the deployment of the military to assist police there. As part of its new crackdown, Hungary says it has arrested 60 people for damaging the border fence or attempting to cross.

The scenes of chaos the border closure has generated are consistent with those that have played out in Hungary over much of the last couple of weeks. And the cause is clear. The country, under the leadership of Prime Minister Viktor Orbán, is downright inhospitable -- even hostile -- toward refugees.

In the town of Röszke, on the Hungarian border to Serbia, police could be seen in recent days wearing face masks and rubber gloves as they herded together thousands of new arrivals into registration camps that looked very much like improvised jails. The facilities have tents without rain protection, a lack of blankets, little food and medicines and a dearth of portable toilets, not to mention frequent tensions between refugees and police.

Hungary in recent days has been showing its ugly side to the world. Videos made the rounds of a Hungarian camera women for a right-wing TV broadcaster tripping two children and kicking a refugee father as he held his child. She quickly became the public face of the nastiness emerging from Hungary. And although her employer has since fired her, the images remain.

Orbán: Criticism from Abroad 'Dishonest'

Anger is growing among Western European governments about Hungary's politics, but for Orbán, 52, who has been in office for five years, the predominent emotion seems to be self-satisfaction. During a meeting with Hungarian ambassadors on Sept. 8, Orbán said Hungary's response -- the construction of an anti-refugee fence of steel and razor wire -- was exemplary and he dismissed criticism from abroad as "dishonest."

Soon, Orbán said, Western governments in the European Union would recognize that the people of their countries no longer want to take in Muslim refugees. Just under 70 percent of Hungarians support Orbán's hardline approach. Indeed, when Orbán coopts issues like immigration from the far-right, it actually helps his party take votes away from the extremist Jobbik, which is currently stagnating in polls.

Just a short time ago, thousands of refugees could be seen crowding into Budapest's Keleti train station. For a brief window, they were able to travel freely to Austria and Germany with the support of the governments in Berlin and Vienna, but that came to an end on Sunday, when both countries reinstanted border controls. Officials in Germany have said the controls are temporary, set up in order to give the states necessary breathing room to manage the refugees who have already arrived. But it is also clearly intended as a political message to other EU countries that German will insist that they share the burden of hosting refugees.

At a meeting Monday of EU interior ministers, officials agreed to distribute 40,000 migrants currently in Greece and Italy, but only on a voluntary basis. No deal is in sight for a further 120,000 asylum-seekers the European Commission would like to spread out among all EU member states.
Orbán may be leading the opposition, it's not as if he's isolated in Europe. Latvia, Lithuania, Poland, Slovakia and the Czech Republic also continue to reject the idea of mandatory EU quotas.

Indeed, the Hungarian prime minister has so far emerged as the political victor in the European refugee crisis. But who is this man who has inflamed Brussels and yet has the enthusiastic support of voters at home?

A Politician Who Loves Conflict

"He's highly intelligent and he has a strong instinct for the mood in his country," says former Orbán confidant Gábor Fodor. "And he loves conflict -- that's where he excels as a politician."

Fodor once shared a room with Orbán as a university student. Together, the two founded Fidesz, originally the "Alliance of Young Democrats," which today forms Hungary's nationalist-conservative government.

"Back then, though, we were alternative, liberal and radical," says Fodor, who is today a member of the Hungarian Liberal Party, part of a parliamentary opposition so hopelessly splintered that it represents no threat to Fidesz. "We rebelled against the Communist Party, and also against the church -- and Orbán was responsible for the radical elements."

Photos taken at the time show today's prime minister wearing his hair long and sporting sideburns. "He came from the countryside, he was the first person in his family to go to college and he wanted to get ahead," Fodor recalls.

But after the fall of the Iron Curtain, ideological divides began to emerge. "Orbán recognized that Hungary was lacking a modern conservative party and began steering Fidesz in that direction. One has to recognize that now as having been very far-sighted." Today, Fodor and Orbán are no longer on speaking terms. "Orbán is leading Hungary in the wrong direction," Fodor says.

Orbán was first elected to parliament in 1998. Initially, he didn't attract much attention in Europe, but that would change after the 2010 national election. Orbán secured a two-thirds majority for his party and began consolidating power in the political system around himself. He brought the public broadcasting system under his control, he curbed the Constitutional Court's power and he pushed through a new constitution with a nationalist preamble.

'Hungary Will Not Be a Colony!'

The 2008 economic crisis, which hit Hungary with a particular vengeance, contributed to Orbán's victory. The International Monetary Fund had to intervene with emergency loans, which Orbán paid back with great fanfare. "We solve our problems with a Hungarian heart and mind," he said again and again. He also stated that Hungarians are allergic to advice from other countries. "Hungary will not be a colony!" he said in March 2012. "We are more than familiar with the character of unsolicited comradely assistance, even if it comes wearing a finely tailored suit and not a uniform with shoulder patches."

It was a play on the old days of the Austrian Empire and the Soviet times, eras during which Hungary often had to take measures to defend itself against the influenes of much greater powers. This time, it was Orbán defending his country against the paternalism of foreign powers. It's a message that has struck a chord among many voters. Orbán has done much to anger officials in Europe during his time as prime minister, but he has also been adept at shifting course in the face of criticism from Brussels just in time to prevent the EU from being able to take legal measures against Budapest's creeping attacks on democracy.

Throughout, Orbán has presented himself as being calm, confident and composed. He shuns folklore as a path to popularity, instead presenting himself as a pious church-goer. It is rare for Orbán to lash out at his domestic detractors, but when it comes to the EU, he can be quite fierce and sharp-tongued. One of Orbán's ruling principles is that of knowing where his enemies are.

Sometimes he lashes out at the banks and others at energy utility companies if there's some way he can reduce financial burdens for his people. Orbán wants to be a fatherly leader -- strict domestically, upholding Christian traditions, and strong abroad, defending his country against the upheavals of globalization.

After his reelection in 2014, however, Orbán's public opinion numbers soon began tumbling.

The economy grew only slowly, and allegations of corruption began to haunt the Fidesz party.

The right-wing extremist Jobbik party managed to drive out a few Fidesz mayors in elections, but then the refugees came to Orbán's aid. Hungary lies at the end of the Western Balkans route, and an estimated 167,000 people have crossed the country so far this year on their way to Western Europe.

'You Cannot Take Away Hungarians' Jobs'

At first, in the context of a "national consultation," Orbán sent a questionnaire out to Hungarian citizens addressing the issue of foreigners. Around 1 million Hungarians responded, which Orbán interpreted as support for his hardline course.

In a second step, he had signs put up that were aimed at refugees, with slogans like, "If you come to Hungary, you cannot take away Hungarians' jobs." The signs were all in Hungarian, making it clear that the message was directed domestically, as if to reassure voters that the government was taking action.

Orbán's third and most spectacular step was the construction of the razor-wire fence along the Serbian border. The plan is to reinforce the bulwark as quickly as possible by enhancing it with four-meter (13 foot) steel fence.

The fourth step took place a week ago Friday, when Orbán met with his colleagues from Poland, Slovakia and the Czech Republic, countries that hold similar views on the refugee issue.

Now, a new, anti-immigration eastern bloc is forming within the EU. And Orbán is its leader.

"We believe in values like patriotism, country, family, nation," says Gergely Gulyás, a Fidesz parliamentarian who briefly studied law in Hamburg and who speaks German and English. "I know we get bad press outside the country," Gulyás says. "In the media landscape, the left-wing and liberals dominate. They have zeroed in on us."

Gulyás, who is dressed in a dark blue banker's suit and has a giant office decorated with an EU flag, admires Orbán. When it comes to refugee policy, he claims, the prime minister took exactly the right action. "We want to decide ourselves how many Muslims we live with."

In order to put an end to the ugly scenes and the suffering at the border, he claims, Hungary "finally" needs to better secure its borders. The completion of the border fence this week and the new law on illegal crossings as well as a newly formed battalion of "border guards" who can arrest the refugees in certain areas are all part of the strategy.

'Orbán Is a Man of War'

There are some in Hungary who say it's the wrong strategy. "That will make everything even worse -- tens of thousands of people will be stuck on the Serbian side. How will the police keep these people from simply tearing down the fence?" asks Ferenc Gyurcsány.

Gyurcsány, who is on the opposite side of the political spectrum from Orbán, preceeded him as prime minister. Nevertheless, he admires Orbán's hardness and political finesse. "Orbán is a man of war," he says.

Having become rich in the unregulated years of privatization, Gyurcsány has a mansion at the foot of Budapest's Castle Hill, two rooms of which he has emptied to accomodate refugees.

Every evening at around 6 p.m., the people from a Budapest organization assisting refugees calls him in search of emergency housing. So far, he's had 36 guests. "They all continued onwards to Germany," he says.

Last week, Gyurcsány visited the overflowing Bicske refugee camp. Even though several thousand people cross the border every day, Hungary officially has little more than 6,000 spots available in refugee camps. "Orbán's government deliberately allowed the problem to get worse," says Gyurcsány.

It wouldn't have cost much to put up a few hundred more tents and print out some brochures in Arabic, Gyurcsány says. But Orbán instead focused on deterrence.

Gyurcsány leans back and says he still has hope. "Something has changed. The people have become more willing to help," he says. "It seems as though the mood is changing in Hungary.

The photo of the drowned boy on the Turkish beach also touched the people here." Orbán, he claims, shouldn't be so heartless. "Otherwise he'll lose his fatherly aura."

But the prime minister has often shown that he can be flexible when it comes to his power. He told his ambassadors last Monday that he is not all that opposed to the EU refugee quota. Now, he claims, is simply not the time to discuss it. The diplomats were astounded.

Can Brazil Turn Its Economy Around?

Knowledge Wharton

Rating agency Standard & Poor’s downgrade last week of Brazil’s sovereign rating to the non-investment or “junk” category is a wake-up call for the country to correct its finances and build the political consensus to achieve that. Brazil is facing a severe recession, and its economy is expected to shrink by 3% this year and again in 2016, before returning to modest growth by 2017, according to S&P.

It does not help that an economic slowdown is also underway in China, Brazil’s main trading partner, hurting the latter’s exports to that country. Meanwhile, Brazil is wracked by corruption scandals involving senior politicians that threaten the stability of the government of President Dilma Rousseff, who is now in her second term. Despite those headwinds, experts feel Brazil still has time to correct its course, restore confidence among investors and lenders and avert another, potentially devastating downgrade.

“The junk rating is a big warning … [and] a big red flag,” said L. Felipe Monteiro, professor of strategy at INSEAD in France and a senior fellow at Wharton’s Mack Institute for Innovation Management. Monteiro is an expert on Brazil, having taught there and advised foreign companies investing in that country. “The likelihood of another downgrade depends on what Brazil does now to address the issues that have been raised.”

Formidable Challenges

In its rating action last week, S&P cited mounting political challenges Brazil faces, “a lack of cohesion” in Rousseff’s cabinet and the possibility of “greater economic turmoil” than the rating agency currently expects. In particular, it noted repeated revisions to Brazil’s fiscal targets in a short period. Brazil’s government on August 31 proposed a budget with a primary deficit of 0.3% of its gross domestic product (GDP), instead of a 0.7% surplus it targeted in July, which also was a revision from earlier estimates. “This change reflects internal disagreement about the composition and magnitude of measures needed to redress the slippage in public finances,” S&P said in its research update last week.

Monteiro used the analogy of exercise and good health to explain Brazil’s downgrade. “Everybody knows we need to exercise and eat healthy, and sometimes you only [act] when you have a heart attack Twitter ,” he said. “I see the current downgrade as a heart attack. Brazil now needs to eat healthy and exercise.” If the country “continues to be in denial, the consequences would be much stronger than just a heart attack” and may risk the life of the patient, he added.

Already, Brazilian companies that took on $270 billion in international debt during the boom years are seeing their funding costs rise after the downgrade, according to a Bloomberg report.

However, the downgrade has not yet caused widespread panic among global investors because the two other big rating agencies, Moody’s and Fitch Ratings, maintain an investment-grade rating for the country, said Monteiro. “If more than one rating agency were to downgrade the country, it could lead to a flight of capital from the country,” he said. Alongside, if the U.S. Federal Reserve were to signal higher interest rates, that would make it more expensive for Brazilian companies to raise money, he added.

“The junk rating is a big warning … [and] a big red flag.”
While Moody’s did not follow suit after S&P’s downgrade, it had a month earlier downgraded Brazil sovereign debt to Baa3, which is just below junk level. It also issued a “stable” outlook for the country at that time. Fitch Ratings has a credit rating of BBB for Brazil, which is two levels above junk level. However, a Fitch analyst told Reuters after the S&P action that there still are “elements supporting Brazil’s investment grade.” He added that the possibility of a Fitch downgrade is greater than 50%.

Monteiro said ongoing investigations into Brazil’s corruption scandals have “aggravated the political situation.” Over the years, hundreds of millions of dollars allegedly went into kickbacks to politicians, including those from Rousseff’s Workers’ Party, from contracts awarded by Brazil’s state oil company Petrobras. Investigations cover 20 companies for allegedly forming a cartel to inflate contract values, as Knowledge@Wharton reported in April.

“Rousseff faces a perfect storm insofar as her political stability is concerned,” said Monteiro. “She faced the corruption storm and the economic situation has made things worse for her.”

Responding to the Downgrade

Even as she may be politically constrained, Rousseff must take immediate steps to propose a new budget that addresses the major concerns about fiscal stability, said Monteiro. “There has been talk of raising new taxes and creating a temporary financial tax. But before that, they have to come up with credible measures to cut expenses,” he said. “The government should respond in a timely, professional, transparent and credible way.” He noted that the Rousseff government must also reassess social programs it (and its predecessor government) have committed to, and consider the feasibility of cuts.
“We don’t have time for political battles any more. The consequences of not doing something could be too high.”
Monteiro identified three “wrong reactions” to the downgrade. “One has been denial,” he said. He explained that it doesn’t help to question the credibility of the rating agency, as some politicians have. The second type of reaction has been to go overly pessimistic, he said. “This is not the end, and Brazil will get out of this or has all the conditions [necessary] to get out of this.” The third type he criticized was “an amateurish reaction” that expressed shock or surprise. “The downgrade was not an accident,” he explained, adding that it was widely expected, if not its precise timing.

The impact on Brazil of China’s slowdown would be limited, Monteiro said. He acknowledged that China is a big importer of commodities from Brazil and that falling prices have hurt the latter. “However, Brazil is not an export-oriented economy, and its strength lies in its domestic markets,” he said. “Part of the solutions should come from Brazil’s ability to get the economy back on track and make the internal market work well again.”

Another big concern is that Brazil has shed about 900,000 jobs so far this year, Monteiro noted. Here, again, he saw the domestic economy as providing the requisite job growth opportunities.

Brazil’s foreign trade accounts for only 12% of its GDP ($2.35 trillion in 2014), “which means much of the recovery has to come from within,” he explained. Brazil’s unemployment rate touched a five-year high of 7.5% in July 2015.

In achieving an economic rebound, Brazil must also create a more friendly business environment, said Monteiro. “Doing business in Brazil is very difficult with the bureaucracy, red tape and labor laws,” he said. The World Bank this year ranked Brazil 120th for 2015 out of 189 countries in terms of ease of doing business. The Bank also said last year that Brazilian courts in 2013 had to deal with 3.8 million labor lawsuits, and that companies had to spend too much time on resolving tax issues.

Even in these rough times, “the positives are that [Brazil’s] institutions … and its democratic processes … are working very well,” said Monteiro. “The judiciary has been free to pursue its mandates, and the press has been free to show what is going on.” Brazil’s citizens could also influence course corrections in the economy, and people have of late taken to the streets every few months, he noted. “Depending on the government’s reactions, we may see huge demonstrations again. They are on standby.”

Above all, Monteiro called for “a credible and professional reaction” from the government. “Many investors have lost patience with Brazil when they see promises that are not credible,” he said. “We don’t have time for political battles any more. The consequences of not doing something could be too high.”

BofA: Fund Managers Bracing for Recession, Emerging-Market Default

By Rob Williams

Image: BofA: Fund Managers Bracing for Recession, Emerging-Market Default (Dollar Photo Club)

Fund managers are bracing for a recession as they pull money out of emerging markets like China and seek the safety of cash and bonds, according to Bank of America Merrill Lynch.

The bank’s monthly survey found that the percentage of investment professionals who were weighted toward stocks fell from 41 percent in August to 17 percent this month, the lowest in three years. Fund managers also had the worst expectations for global economic growth in five years.

That kind of widespread gloom may be a contrary indicator of stock-market gains, said Michael Hartnett, chief investment strategist at BofA.

“Unambiguous pessimism means risk assets riper for a rally,” he said in a Sept. 15 report obtained by Newsmax Finance. “If no rally, then markets ominously hinting ‘recession’ and/or ‘default' imminent.”

The bank’s survey comes after a volatile August, when China devalued its currency and investors feared that the world’s second-biggest economy was in deep trouble. U.S. stocks sank more than 10 percent from this year’s highs, putting them in correction territory.

Meanwhile, the risk of missing a bond payment has increased for countries including Ukraine, Pakistan, Egypt, Cyprus, Russia and Brazil, according to credit-default swap data.

As fund managers turned cautious, their allocation to cash rose from 5.2 percent to 5.5 percent, a high not reached since Lehman Brothers Holdings Inc. collapsed seven years ago, according to BofA’s research.

Portfolio managers also expected a more dovish stance from the Federal Reserve, which meets this week to set the cost of borrowing. The percentage of fund managers who expect a Fed rate hike tomorrow fell to 25 percent from 48 percent, BofA said.

Michael Pento, president of Pento Portfolio Strategies, is among the investment advisers who recommends getting out of stocks until the Fed goes back to looser monetary policy.

The idea that the Fed will only raise interest rates once this year and then stay on hold “has no historical basis and is just wishful Wall Street thinking,” he said.

Once the Federal Open Market Committee starts raising rates, it won’t stop until there are signs of an economic slowdown, Pento said in a Sept. 14 blog. He points to historical precedence of hikes in the past 30 years and to the “dot plot” estimates by FOMC members that show rate increases through 2016.

“The Fed will only be able to move the Fed Funds Rate higher by 50 to 75 basis points before it becomes obvious even to the hopelessly confused FOMC that global markets and economies are in serious trouble,” he said. “This is why wise investors should now be out of, or short, the stock market. At least until the S&P 500 trades near 1,600; or the Fed transitions to an easing stance.”

Rate Increases Help Banks First

Data on past Fed moves show interest on deposits rises more slowly than on loans

By James Sterngold

A rate increase would benefit lenders more than savers.       A rate increase would benefit lenders more than savers. Photo: Superstock/Everett Collection

When the Federal Reserve ultimately raises interest rates, banks will get more out of it than savers will.

Consumers have been anxiously awaiting a bump in rates to lift the interest on their deposits from near zero. But an examination of the data from previous rate increases shows that deposit rates may not move much at all, even as rates on some loans climb almost immediately.

In periods of rate increases by the Fed over the last two decades, the average interest paid on deposits rose by only about 0.25 percentage point over the first year, according to data provided by

Over the same period, the rates on 30-year fixed-rate mortgages increased by more than twice as much, and the prime borrowing rate, a benchmark for everything from credit cards to home equity lines of credit, rose by eight times as much.

The result for consumers is the flip side of the fillip bank profit margins are expected to get when interest rates go up. When rates rise, banks push up the rates they charge for loans much more quickly and further than what they pay depositors for their funds.

The Fed is expected to lift its benchmark interest-rate target from near zero this year.

Expectations that it could do so when it meets Thursday have eased, though it would have other opportunities in October and December.

Consumers have been collecting little interest on their savings since the Fed moved rates to near zero in December 2008. There is some reason for optimism as the central bank prepares to reverse course. According to Bankrate, depositors were getting 0.3 percentage point a year in interest on the average money-market deposit account, higher than the current fed-funds-rate target of 0-0.25 percentage point. In the last three rate-increase campaigns, deposit rates stood below the fed-funds rate.

Eventually, some experts and bank executives also say that savers may see more of a deposit-rate increase than they have in the past, especially if the Fed’s short-term target ultimately goes up by a half percentage point or more. Many economists forecast a quarter-point increase to start.

In 2006, banks passed along 17% of the increase in rates to depositors over the next year, said Erika Najarian, head of U.S. banks equity research at Bank of America Corp.’s BofA Merrill Lynch Global Research. This time, the figure could rise to 30% or so, she said, in part because of new rules that encourage banks to hold more retail deposits and the ease with which consumers can now switch to higher-yielding accounts thanks to the prevalence of banking on mobile phones and computers.

J.P. Morgan Chase & Co.’s chief financial officer, Marianne Lake, also has said that the lag might be shorter than in the past for depositors.

“We are expecting retail deposits to reprice higher and faster in this cycle,” she said on a July conference call.

But any predictions may turn out to be premature. Few know how consumers will react to rates moving off a level that has been at a historical low for more than a half decade. The Fed also may move slowly, increasing rates by only a very small amount, or not at all. If the economy slows down or global market jitters from China put a chill on confidence and the U.S. economy, the Fed may resist rate increases, leaving savers in the familiar position of earning very little.

“I don’t think you’re going to see much of a change in what banks pay depositors until the Fed’s second rate move,” said Scott Hildenbrand, a principal at Sandler O’Neill + Partners.

He says rates would likely have to move by one percentage point, or four increases of the type some investors expect Thursday, before it makes much of a difference to depositors.

That scenario “could take a year or more,” said Donald Musso, an investor in a number of community banks and chief executive of New Jersey-based FinPro Inc., a bank consulting company. The initial rate increase, for savers, “will be ho-hummish.”

Banks are expecting to gain from the strategy of holding down the cost of what they pay depositors while charging more for loans. In its second quarter earnings report in July, BB&T Corp. BBT 0.00 % , of Winston-Salem, N.C., calculated that if it increased the prime rate it charges borrowers by one percentage point, its net interest income would rise 1.6%.

Many midsize and smaller banks will look at the large banks for direction. “The largest banks, when they move, will have an influence” on the rest of the industry, said Dick Evans, chairman and CEO of Cullen/Frost Bankers Inc. “There’s no question that an adjustment in the [Federal funds] rate upwards would be quicker on loans than deposits.”