Like Asia, European equities have gotten a lot cheaper compared to historical averages. Another simi...
What Greece Can Learn from Hungary
06/10/2011 10:51 am EST
While Athens seethes over unsustainable austerity, Budapest is making a concerted push for jobs and growth, writes senior editor Igor Greenwald.
This is a tale of two countries in Europe.
Both got in trouble after decades of corruption, sloth, and wasteful spending.
One took the advice of the European Union, the International Monetary Fund, and its richer allies and creditors. It’s now more of a basket case than ever, with a 16% unemployment rate and an economy expected to shrink 3.5% this year.
The other country told the would-be foreign nannies to shove off, and opted for a radical and homegrown remedy. It’s the one that just reported better-than-expected growth of 2.4%, and can boast that its stock market has outperformed every other in the emerging—and developed—world, year-to-date.
The weak sister in this comparison is Greece, and it appears to have sealed its fate by adopting the austerity prescribed by foreign dignitaries. Predictably, tax collections missed estimates as the last vestiges of growth curdled, but the government is now doubling down on the pain to secure a second bailout it has no realistic hope of repaying.
In contrast, Hungary’s center-right government rejected the austerity program prescribed by the IMF. Instead, after winning a landslide election victory a year ago, it embarked on a radical plan widely panned in the West. It included:
- the introduction of a flat income tax
- tax breaks for small businesses
- surcharges for banks, utilities and telecoms, some of them foreign-owned
The Fidesz party, led by the popular (and controversial) prime minister Viktor Orban, also nationalized private pension assets to get by without the IMF’s help.
And, borrowing a page from Franklin Roosevelt, it created a public employment scheme for the long-term unemployed. Hungary has high unemployment too—though it should be noted that, at 11.4%, it’s more than three percentage points below Greece’s.
In This Case, the Ends Justified the Means
Now, we can quibble about how much Hungary’s reprieve owes to the export boom in neighboring Germany...probably quite a lot, I think. We can question if the bounce it’s now seeing will prove sustainable. But there’s no arguing that it’s in a much better place than Greece, and has a much better chance to save itself.
Don’t take my word for it: Budapest now feels confident enough to pitch its plan as a global alternative to austerity in The Wall Street Journal.
Despite all the complaints that the pension grab and the tax surcharges would drive foreign investors away, nothing of the sort has taken place.
In fact, the US State Department notes that investors have welcomed the recently unveiled plan for deep structural reforms, to the point where “by May 2011, the country had already met its foreign currency financing requirements for 2011 through two large dollar and euro bond issuances.”
When Hungary offered €1 billion worth of eight-year notes last month, the offering was four times oversubscribed. The rate was 6%. In contrast, the market is now demanding 25% from Greece for a two-year loan, by which it means, “Fuggedaboutit.”
NEXT: Greece’s Tsourekis Were Tied|pagebreak|
Greece’s Tsourekis Were Tied
It’s possible that the course pursued by Greece and Hungary was dictated by their respective leaders—and those leaders’ core constituencies.
The leader of Greece’s ruling Socialists, George Papandreou, is the son and grandson of prime ministers. He’s charged with dismantling the economy-choking bureaucracies created by his father.
While the austerity he has advocated is wildly unpopular, it does serve the interests of Greek bankers and domestically owned Greek companies, which after decades of patronage are filled with reliable Socialist voters. Default and devaluation might create lots of private jobs, but they would also doom Greek bureaucrats’ aspirations to Western European living standards.
In contrast, Hungary’s Orban grew up doing farm work in the countryside, and appeals most to the conservative small-business owners who got the most goodies under his reform plan (and no doubt American supply-siders.)
He’s not afraid to squeeze Hungary’s biggest companies or the state bureaucracies, which are filled with political opponents.
US pundits have wondered for a year why Greece would pursue an obvious dead end that has no chance of reigniting growth or paying off its debts. My answer is that Greece’s government is merely buying time to give its friends to empty bank accounts before the inevitable default and devaluation.
Hungary’s government is also buying time, but at least it’s buying it for reforms that stand a chance. And it’s buying it pretty cheap to boot, no thanks to the IMF.
* * *
The Problem with Peru
Peru also had an exciting week, as the presidential candidate whose brother is serving a 25-year prison sentence for an attempted coup beat out one whose father is doing identical hard time for condoning death squads while he was president.
Peru’s stock market plunged 13% the next day, on worries that President-elect Ollanta Humala would emulate his onetime pal Hugo Chavez, while Humala’s team invoked the cuddlier image of Brazil’s former president Luiz Inacio Lula da Silva, the leftist icon who unleashed an economic boom by balancing the books and letting businesses get on with business.
Campaign pledges to raise taxes on the mining companies that are key to Peru’s fast-growing economy got soft-pedaled, becoming a consultative affair that would honor existing contracts and leave the miners internationally competitive.
Perhaps that was enough to convince investors. Or perhaps the 12% rebound by Peruvian stocks had something to do with the fact that, despite the 27% decline year-to-date, Peruvian equities have returned 25% annually over the last decade, according to the scorekeepers at MSCI.
Emerging markets on the whole averaged a 13% annualized return in dollar terms over the last ten years. The average return on US equities over the last decade, from the same source? 0.28%.
But these are backward-looking numbers—and therefore, as disclaimers have taught us, neither here nor there. Perhaps a decade of such strong growth has left emerging markets hopelessly overpriced.
Not quite, writes Yiannis Mostrous, who notes that the MSCI Emerging Markets Index sells for 10.4 times forward earnings, some 23% below the long-term average.
Your mileage may vary: Morningstar puts the EEM’s forward price/earnings at 11.9, for example. The Peru ETF’s (EPU) forward P/E stood at 9.4 at the end of May, Morningstar claims.
If Humala is really like Lula, this week’s buyers will get paid for being brave.
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