1. Regional workshop Vilnius 9-10 June 2009 The characteristics of the economic crisis in Hungary Dr. Imre Szabo LIGA

2. Factors of vulnerability of CEE economies High external financing need Current account deficits are high (in certain countries this was accompanied by high external debt levels) Macroeconomic imbalances, chronic dependence on external financing and a high level of economic and trade integration with the EU15 Western banks made extraordinary profits in the region and were expecting continued expansion in the region (over 80% of the banks of Central and Eastern European countries are affiliates of Western banks) Household debt in several new member states largely denominated in foreign exchange Dependent position (also appears on the micro-level, as a large part of CEE economies are dominated by foreign multinational enterprises with strategic decisions made at the Western company headquarters) Highly dependence on external demand.

3. Financing risks Debt risk Currency risk Social risk Credibility risks Financial risk Investor confidence risk Political and social risk Growth risks Producing risk Job risk Labour market risks Employment risk Unemployment risk Social risk Budget risk Challenges facing Hungary

4. Exchange rates vs. Euro I.

5. Lack of credibility played a decisive role in the financial rescue package Source: Ministry of Finance in Hungary

6. Rates of the long government bonds (from 2007 till 2009)

7. Source: Eurostat Hungary’s general government debt in relation to GDP 1996-2009

8. The growth rate of the Hungarian economy has sharply slowed down: 10 year low Source: Hungarian National Bank

9. GDP

10. Source: Eurostat The economic growth rate of Hungary and some of its competitors in 2007

11. Source: Eurostat EU-27 average: 66%: Employment rate in the European Union, 2nd quarter of 2008 (15-64)

12. Source: OECD database Country Total tax wedge Personal income tax Social security contributions for employee Social security contributions for employer Belgium55,521,510,723,3 Hungary54,516,112,625,7 Germany52,218,417,416,4 France49,29,99,629,7 Austria48,5121422,5 Italy45,914,47,224,3 Sweden45,415,65,324,5 Netherlands4412,118,613,3 Finland43,718,95,419,4 Czech Republic42,97,79,325,9 Poland42,85,420,417 Greece42,37,912,521,9 Denmark41,330,210,60,5 Spain38,910,84,923,2 Slovakia38,57,110,620,8 Luxembourg37,51312,611,9 Portugal37,49,38,919,2 United Kingdom34,1168,49,7 Ireland22,37,94,79,7

13. Tax wedge in certain group of countries and in Hungary

14. The average tax burden in Hungary was the second highest in the European Union (2007) Out of HUF 100, the state gets HUF 54.5, the employee gets HUF 45.5 Due to the 2006 autumn austerity measures the tax burden of employees increased by 3.5%

15. Ratings of the long-term debt of Hungary Moody’s: Moody’s: 09/12/2002 A1 12/22/2006A2 11/07/2008 A3- Standard and Poor’s: Standard and Poor’s:12/19/2000A- 06/15/2006BBB+ 10/15/2008BBB+ with negative expectations Fitch Ratings: Fitch Ratings:11/30/2000A- 12/06/2005BBB+ 11/10/2008BBB

16. Share of foreign currency loans in total credit to

17. The debt of the household sector

18. Hungary is highly vulnerable Source: Hungarian National Bank 200320042005200620072008 Net financing capacity of the main sectors and external equilibrium as a percentage of GDP

19. Exchange rates vs. Euro II. 260 270 280 290 300 310 320 2008.12.182009.01.072009.01.272009.02.162009.03.082009.03.282009.04.172009.05.072009.05.272009.06.16

20. IV. Hitelességi kockázat Kamat mi és régió, állampapírhozamok Hungary pays a substantial interest rate premium as a consequence of losing its credibility (The central interest rates of the Visegrad countries) HungarianPolishCzech Slovak Source: Hungarian National Bank

21. (5-year interest rate differences in relation to the Euro in 5 years in the Visegrad countries, 2006-2008) The proximity of the Euro-zone decreases interest premium Source: Hungarian National Bank basis point Hungarian forint Polish zloty Czech crown Slovak crown

22. Source: Eurostat The economic growth rate of Hungary and some of its competitors in 2007

23. Changes in employment and unemployment,15-64, 2006 -2008 Thousand persons 2006 2007 2008 I. II. III. IV. I. II. III. IV. I. II. III. Source: Central Statistics Office

24. The former PM Mr.Gyurcsány resigns

25. The new PM Mr.Bajnai attests

26. The volume index of the industry and processing industry

27. LIGA Crisis Conference (debate )

28. LIGA demonstration of Labour Day on 1 May

29. Thank you for your attention Dr. Imre Szabo szabo.imre@vdszsz.hu