CHAPTER 8

The Coercion of Creditworthiness

ON APRIL 10, 1987, the staff of PlanEcon, the most authoritative Western publication on the communist economies of the Eastern Bloc, told its readers, “We may sound very cynical, but it is not far from the truth to say that Hungarian economic fortunes in the near future do not depend on anything done in Budapest, but will be determined in Tokyo. We doubt very much that Mr. Kadar yet understands this and the implications of such a situation for Hungarian economic sovereignty.” Over the previous two years, the journal noted, Japanese banks flush with surplus capital from the booming Japanese economy had indiscriminately financed the Kádár government’s plush domestic economic policy. But time was running out. PlanEcon went on, “If and when Western banks finally realize . . . what Hungary is up to, they are likely to bring their lending activities to a screeching halt and cause [a] severe economic crisis in Hungary.”¹

Almost three years to the day after this stinging analysis, Hungary held its first multiparty democratic elections since the start of the Cold War. The financial pressures described in the dire warnings of a financial trade publication in 1987 were intimately connected to the momentous political changes that shook Hungary, Europe, and ultimately the world in 1989. In the summer of 1987, banks finally realized that Hungary’s debt was unsustainable, and the country lost its creditworthiness on global capital markets. To restore its standing in the financial world, the Kádár government was forced to come to terms with the International Monetary Fund (IMF) on an austerity and structural adjustment program. Leading members of Hungary’s Communist Party, the Hungarian Socialist Workers’ Party (MSZMP), knew such a plan would involve a sharp drop in the living standards of the population, and they consequently feared that the party would lose legitimacy because of the austerity measures. Therefore, in order to build a social consensus around austerity and structural adjustment, the party launched a process to democratize the state.

In their dealings with Budapest, Western actors—particularly Western financial actors—did not intend to democratize Hungary. As in Poland, this would have appeared to be a wildly ambitious goal because there was no reason to think the Soviet Union would let Hungary leave its orbit. Nevertheless, through a process I call “the coercion of creditworthiness,” Western actors played a significant role in spurring Hungary’s revolution in 1989 by forcing its leadership to confront the politics of breaking promises. Western nations, capitalist banks, and the IMF established a stringent set of economic criteria the Hungarian government needed to meet to maintain access to Western credit markets and receive IMF loans. Because Hungarian officials were dependent on global capital to maintain their domestic social contract, they had little choice but to meet these demands and prepare the country for years of economic hardship. It was this pressure to prepare society for economic adjustment and austerity that ultimately drove Hungarian reformers to embrace political liberalization and multiparty democracy.²

By the spring of 1984, János Kádár’s patience with the austerity of 1979–1983 had worn thin, and he believed the party’s restrictions on the domestic economy had become politically dangerous. At the April 17 Central Committee meeting, he told colleagues, “Believe me, comrades, the two main slogans we cite and reference most often ‘the international economic environment’ and ‘to preserve the results achieved in the standard of living’ can no longer be retained.” He believed that “the deteriorating standard of living” had eroded the support of the people and that a new economic program was needed to restore public confidence. Kádár set the benchmark for the economy’s performance at 2.5–3 percent growth in the standard of living, and he told party officials to use whatever means necessary to achieve that goal.³

Lucky for Kádár, global economic and financial changes that were completely out of his control brought his thoughts of renewed expansion to fruition. After the collapse of the sovereign lending market in the early 1980s, Western banks were no longer willing to put their own capital on the line to fund loans to sovereign borrowers, so they changed the way they issued debt from loans (issued directly from banks) to bonds, which could be sold to any type or class of investor. For Western banks, one group of customers for these bonds stood above the rest: Japanese investors. Japan was the economic and financial juggernaut of the 1980s, and its investors fueled global capital markets. From their perches at Tokyo investment houses, Japanese bankers invested in anything and everything, most famously in the United States—government bonds and Rockefeller Center. But Japanese companies made so much money exporting their products to the rest of the world that not even the massive United States economy could absorb all their surplus capital. Their banks needed to look beyond the United States for investment opportunities. From 1984 to 1987, Kádár’s Hungary became one of the preferred destinations.⁴

János Fekete, the long-standing vice chairman of the National Bank of Hungary (NBH), played Japanese favor for all it was worth. Although investors in New York and London continued to shun Hungarian bonds, Fekete used Tokyo’s enthusiasm for Hungarian debt to meet Kádár’s policy demands. In 1985, he told the IMF that “he was not concerned about the balance of payments” because “Hungary had at present no difficulty in getting medium and long-term funds.”⁵

The communist leadership wasted little time in turning the country’s renewed access to capital abroad into new promises at home. When the Thirteenth Party Congress arrived in March 1985, the party endorsed a renewed effort to raise the living standards of the population. NBH governor Mátyás Tímár later explained the dynamics of the congress in terms of the politics of making promises. “As in the West,” he said, the elections that took place at the congress were “accompanied by promises. The party congress wanted to paint an optimistic picture and promised more investment and better living standards.”⁶ As 1985 unfolded, the party released the reins on imports from the West, borrowed Japanese capital to pay for them, and rapidly deteriorated the balance of payments. In the three short years from 1984 to 1987, the country’s hard currency debt nearly doubled from $9.4 billion to $18.1 billion.⁷

Despite the leadership’s enthusiasm for renewed growth, red flags abounded both within Hungary and across the Atlantic Ocean. Officials at the National Bank of Hungary encouraged the IMF’s managing director, Jacques de Larosière, to emphasize in his dealings with Hungarian leaders “that from the external standpoint the economy remained far from a safe harbor.”⁸ At the IMF annual meetings in the fall of 1985, Fund officials did their best to make clear to Fekete “the risks he [was] running with renewed heavy borrowing.”⁹ But despite their insistence on “the foolishness of building up a debt exposure,” Fekete told them he “felt under no pressure” from global capital markets.¹⁰ The staff at PlanEcon judged this mentality acerbically. “In order to please Mr. Kadar,” they wrote, “Hungarian bankers are supporting unsustainable economic policies and deliberately bringing the country ever closer to an external payments crisis.”¹¹

With Fekete whispering in his ear, Kádár remained unconvinced that crisis lay just around the corner. In June 1986, he told the Politburo, “I say, comrades, we cannot change the decision of the Congress, the five-year plan, or the annual plan. . . . Those decisions pointed us in the right direction. . . . The plan must be kept.”¹² To the surprise of financial policy makers in both the NBH and the IMF, global markets continued to fund Kádár’s unsustainable dreams throughout the summer. L. A. Whittome, a senior official at the Fund, declared himself dumfounded. “It is amazing that the banks are prepared to go on lending at very fine terms to Hungary in this situation.”¹³

As summer turned to autumn, however, the country’s deteriorating financial position led many leading Hungarian officials to embrace the need for foundational economic and political reform. Károly Grósz, whom many expected to succeed Kádár, signaled a change in his own thinking in an interview with a small Hungarian publication, Siker. “Unless we change our present conditions, the economic-technological challenge of the world will impose increasingly heavy burdens on us,” he said. Since launching the New Economic Mechanism in 1968, the party had been unable “to modernize the structure of our economy.” And these eighteen years of persistent problems had demonstrated that “it is not just a technical problem . . . it is a political problem.”

The political problem he had identified was, in essence, the politics of breaking promises. As Grósz said, “If we place greater value on bigger and better performance, then some workers will earn more than others. And if we penalize performances which are below average, then some other workers will get considerably less money than the average worker. In other words, the differences in earnings will increase considerably, a condition which our society still barely tolerates.”¹⁴ For Grósz, a man who “publicly expressed admiration for Mrs. Thatcher’s achievements in reviving the U.K. economy,” this aversion to inequality was born of a misreading of the very socialist doctrine the country professed to follow.¹⁵ Grósz stated, “Marxism has never accepted egalitarianism, but rather the postulate of equal opportunity. This postulate takes into account, in all respects, the possibility of considerable inequality. . . . Equality has never been and cannot be a feature of socialism. Its great advantage consists precisely in its ability to automatically grant greater opportunity to everyone than does capitalism.”¹⁶

It was a view of Marxist doctrine that fit the times, and Grósz was not alone in holding it. At the same moment, Imre Pozsgay, a headstrong cadre who had been banished from the top leadership of the party in 1982 and became leader of the party’s umbrella social organization, the Patriotic People’s Front (PPF), commissioned a report from a group of fifty economists and social scientists on the causes of the economic crisis and avenues toward reform. The document they collectively produced, “Turnaround and Reform,” outlined the leading reformist economic thinking at the time and marked the first step in the Communist Party’s strategy to develop social and political pluralism as a means of implementing the politics of breaking promises.

“The 1980s, and particularly the experiences of 1985–86,” the report began, “indicate that the Hungarian economy is in a serious situation.”¹⁷ The authors believed that the country’s reliance on the stilted trading and financing systems of Comecon, the inconvertibility of the forint (the national currency), and significant government restrictions on imports had all unduly sheltered Hungarian industries from the competition of the global economy. If the country was to recover, the party and government would have to close inefficient enterprises, make the forint (Ft) convertible, liberalize imports, cut corporate taxes and subsidies, adopt a restrictive monetary policy, and allow for a greater degree of wage inequality between workers based on their productivity. In short, the authors believed that the country needed to be exposed to the competitive pressures of the world economy and that the state’s past promises to its citizens needed to be broken.

This process of structural adjustment—a term the report itself used (szerkezeti alkalmazkodas)—would not be quick or popular and would not produce immediate results. “A sincere and realistic reform policy cannot promise rapid economic growth and rising standards of living in the short term,” the report concluded. “In fact, it should be openly said that it might even temporarily bring economic losses.”¹⁸ Because there would be “victims of the reform policies,” the “distribution of burdens” needed to be “made socially acceptable.” To do this, the authors believed the economic reforms needed to be accompanied by social and political reforms that would build social support for change. Because the reform program’s implementation would depend “on actions embedded in people’s behavior,” it needed to “be expanded to other areas of social relations, including political relations.”¹⁹

In its vision for reforming the economy, “Turnaround and Reform” sounded as though the IMF itself had written it. Unsurprisingly, then, IMF officials were pleased and impressed when they learned of its economic contents. What did surprise Fund officials, however, were the political, social, and legal changes also called for in the document. One staff economist called it “a remarkable document” that presented “daring solutions” because “the reform process is interpreted as both a government program as well as a social and political movement.” Under the reformed political system, “interest groups, as well as individuals, would participate openly and democratically in the debate on, and thus identify with, the reforms.”²⁰

This image of politics—as a societal forum for interest groups and individuals to express their competing interests and arrive at consensus—defined Imre Pozsgay’s vision for Hungarian reform. In a 1987 article titled “Political Institutions and Social Development,” Pozsgay sought to diagnose the country’s economic woes. He wrote that to develop an answer, “it is necessary to investigate . . . our political system.” His own investigation had yielded “the realization that the interest relations cannot be explored, and sound and necessary policy decisions cannot be made, without openly letting interests surface, clash and be represented.” This meant that “an essential feature of socialist democracy is . . . the development of a system for the representation of interests.” This was not advocacy for a transition to a Western multiparty democracy. That would come later. In Pozsgay’s vision of reform, the MSZMP retained its leading role in society. But he argued that the Communist Party could no longer assume or impose social consensus on society. Instead, consensus had to be arrived at through the open recognition and representation of society’s competing interests.²¹

While ideas of political reform expanded under the watchful eye of Pozsgay and the PPF, the country’s economic deterioration became undeniable to the party leadership in the fall of 1986. In November, the Central Committee held an emergency two-day meeting to discuss paths out of the burgeoning economic crisis. The resolution published after the meeting euphemistically called for “stabilizing” (rather than raising) the standard of living and “selective” (rather than total) industrial development. Behind the evasive language were clear signals that wage differentiation would increase, social subsidies would be cut, and loss-making enterprises would no longer be supported by the state budget. In an interview after the meeting, János Hoos, the chairman of the Planning Commission, said economic reform had “become a life or death issue” whose successful implementation depended on “the existence of a society-wide consensus that supports this type of conflict-ridden economic policy.” Therefore, he said, the Central Committee had decided to increase the role of party organs and social organizations in economic life because the party’s “main task” in the crisis was to “establish political conditions in which the economic policy can be realized.”²²

As the crisis reached a crescendo in Budapest, Kádár traveled to Moscow in search of Soviet support. In November 1986, he arrived at the meeting of Comecon heads of state at which Gorbachev repealed the Brezhnev Doctrine and told the assembled leaders they now needed to solve their domestic problems on their own. In case Gorbachev’s generalities were unclear, the Soviet leader reinforced his message in a private meeting with Kádár. “For now, the USSR cannot really help,” Gorbachev told him. Soviet officials were well aware of the onrushing crisis in Hungary. Gorbachev told Kádár that Soviet specialists were giving leaders in Budapest “two years to find a solution” but that he could do little to aid them. Gorbachev offered to buy Hungarian meat and grain with hard currency, which padded Budapest’s balance of payments to a small degree, but Kádár returned home to face the burgeoning crisis on his own.²³

While Kádár headed east in search of economic support, Fekete headed west on the same mission. Throughout the late 1980s, he lectured audiences of capitalists about the injustices of the world economy, particularly the Reagan financial buildup and the IMF’s structural adjustment policies. At the IMF Annual Meetings in 1986, Fekete told the assembled financial elite that since the onset of the global debt crisis in the early 1980s, global capital had been flowing in the wrong direction—from the poor to the rich, from the developing world back to the developed. “We are today witnessing a reverse blood transfusion whereby the healthy get blood from the sick,” he declared.²⁴ In a later speech, he cited important and startling numbers: “While during 1972–1982, $147 billion of long-term capital entered the developing countries, the tendency reversed during 1983–1987, when $85 billion flowed out of these countries.” What the world needed, he told the West, was more capital, but what it was getting instead was IMF conditionality. “Severe adjustment programs undermine [countries’] potential for future growth,” he said, and “the balance of trade surpluses attained by so heavy sacrifices are used to service debts.”²⁵

As he delivered these lines in December 1986, Fekete must have known his own country was heading in the exact same direction. The buildup of debt from 1984 to 1986 could delay domestic austerity and structural adjustment but not permanently avoid them. Beginning in 1987, markets would start to coerce Fekete, Kádár, and the reluctant bureaucracies of the Hungarian state into imposing domestic discipline. This coercion of creditworthiness would provide reformers in the party with an opportunity to chart a new economic and political course—one that would jettison the political system and ideological foundation that had guided the state for forty years.

In what he termed the “24th hour for decision-making in Hungary,” Fekete at last took up the reformist cause in February 1987 because markets were losing confidence in his country. After resisting involvement with the IMF throughout the mid-1980s, he now approached the Fund with a request for a three-year financing program to support Budapest’s effort at fundamental structural transformation. Fund officials welcomed the government’s newfound interest in reform but told Fekete that the conditions Hungary would have to meet for a three-year program would be too severe for the country’s current conditions. More appropriate, they thought, would be a one-year standby agreement that would provide the country with some financing but, more importantly, would signal to global financial markets that the government was serious about imposing discipline. Fekete did not like the smaller sum of money that would come with a one-year standby agreement, but he was in no position to make demands. He invited Fund officials to come to Budapest to begin negotiations.²⁶

When the Fund team arrived in mid-April, they quickly realized their Hungarian counterparts now shared their same long-term goals but disagreed over how best and how quickly to reach them. The Fund and the Hungarian government served two masters—global capital holders and the Hungarian people—and their negotiations became an extended debate over how best to neutralize popular resistance to austerity in order to produce policies that aligned with the interests of global finance. In his first meeting with the IMF delegation, NBH governor Tímár told the Fund, “There [is] no big difference between the International Monetary Fund and [the] Hungarian leadership as to what should be done, the difference being largely with regard to timing. Political stability in Hungary was a very important issue.” Tímár was concerned that although “the population accepted the effects of these measures to a certain degree, one had to guard against overloading.” Helen Junz, leader of the IMF delegation, understood his concern but reminded him that he needed to placate global financial markets too. Based on current projections, Hungary would have to borrow $3.5 billion on international credit markets in 1987 and 1988 just to stay financially afloat. “The market,” she said, “would only be willing to support such needs if economic policies were perceived to be effectively channeling resources into productive uses.”²⁷

Promises needed to be broken. Over the course of the Fund’s weeklong visit, Hungarian officials informed their visitors of myriad plans to cut subsidies, raise prices, devalue the forint, allow unprofitable enterprises to go bankrupt, and slash the budget and current account deficits. Indeed, their disciplinary campaign had already begun. In March, the government had devalued the forint by 8 percent against a basket of Western currencies, which made Hungarian exports cheaper but increased the price of goods for Hungarian consumers. Further price increases would come from new personal income and value-added taxes that would take effect on January 1, 1988.²⁸ The leadership was committed to holding the current account deficit for 1987 to $700 million, down from $1.4 billion in 1986, and the state budget deficit to Ft 30 billion, originally projected to be Ft 47 billion.²⁹ If austerity and adjustment was what the Fund wanted, Hungarian officials believed they were already delivering it, and they assured the Fund that more was on the way.

The IMF was not satisfied. Instead of a deficit of Ft 30 billion, Junz wanted to see a deficit of Ft 20 billion. “The progressive erosion” of capital market access, she warned, “must be counted [as] a clear and present danger.”³⁰ Her Hungarian counterparts did not disagree, but they pleaded for patience while they choreographed the implementation of economic reforms in the domestic political arena. In order to “make the whole process politically more palatable,” they planned to “minimize the appearance of outside pressure.”³¹ First, they said, the Central Committee would approve a reform program by July. Parliament would then give its assent in autumn, and a standby agreement with the Fund could then be signed by December. If all went according to plan, a further three-year “consolidation” (read: austerity) program could then be negotiated and implemented from 1988 on.³² Fund officials continued to press for more urgent action, but they were willing to defer to their Hungarian counterparts on how best to lay the political groundwork for the discipline to come.³³

Having coordinated their actions externally with the IMF, Hungarian financial officials turned inward to convince the party leadership of the necessity of taking action. Now fully convinced of the urgency of reform, Fekete told his subordinates at the bank, “The end of May has created a seriously threatening situation, and it is our duty as experts and committed party members to share our opinion. We believe it is essential for the leadership to be aware of [the nation’s] financial position.” The NBH prepared a bleak report for the Central Committee detailing the troubles on the horizon. “We believe that the [projected] 1987 deficit of more than $1 billion cannot be financed in 1988,” the report stated. “There is acute danger, the time to take decisive action is growing short.” To escape the crisis, the government “must reach agreement with the IMF in 1987 on an appropriate stand-by credit and create the political and economic conditions” necessary to implement it.³⁴

One of those conditions would be ensuring that reformers held the key positions within the Hungarian state. To that end, the thirty-eight-year-old technocrat Miklós Németh was appointed head of the Central Committee’s Department of Economic Policy to manage the rapidly expanding reform agenda. Németh later recalled that at the time he took the job, “it was clear to everyone that economic reform steps were not possible without changing the political framework.”³⁵

Everyone, that is, except the man at the top. Kádár accepted the eventuality of reform but remained reluctant to embrace its urgency. “I do not think that we are close to insolvency status,” he told the Central Committee meeting in a June 1987 meeting, “Much of this is a dramatization.”³⁶ With the general secretary dawdling, the Central Committee could not agree on a package of reform and austerity measures, and Deputy Prime Minister József Marjai told Fund officials that their “old line of warning that the banks would lose confidence and cease to be net lenders no longer had credibility.”³⁷

To give a jolt to the debates going on in Budapest, IMF officials decided they needed to up the ante. Upon hearing of Marjai’s message, they threatened to suspend negotiations on a standby agreement and cancel their next trip to Budapest scheduled for July. Junz wrote to Fekete, “We believe that . . . a visit might not be very productive. In fact, it could be counterproductive. . . . The markets might react negatively if it became known that we had begun talks without any positive outcome.”³⁸ Although the letter was addressed to Fekete, its message surely was meant for the authorities above him wrestling over the fate of the country. Once again, the nebulous but all important “opinion of the market” was being used as a cudgel to steer the course of domestic Hungarian debates.

The IMF’s efforts worked. In late June, Károly Grósz formed a new government as prime minister, and the reformers in the NBH and the Ministry of Finance received a mandate to begin disciplining the economy. On July 2, the Central Committee published a new “Program for Stabilization and Evolution” that spoke in weighty tones about the origins and implications of the national economic transformation now required. “In the past decade and a half,” the program’s statement began, drawing attention back to the oil crisis of 1973, “the world economy has gone through radical changes.” But Hungary was “late in adapting to the changed situation.” Now, the time for adaption had arrived, and the results would not be pretty. “A period of stabilization is required,” the program announced, during which the country would have to take on the “burdens that come with restructuring.” Progress would only come by “lowering expenses” and “increasing profitability.” The system of “unmanageable subsidies” would need to be broken, and “loss-making activity” could no longer be “financed permanently at the expense of successful companies.” Wages would need to be determined according to performance, and there would need to be a “temporary restriction in public and private consumption”—in other words, austerity.³⁹

Though none of this would be popular, the reformers knew it nevertheless needed the population’s support in order to succeed. Therefore, the Central Committee paired the announcement of economic bad news with hints of political good news. To support the economic reforms, the new program announced that it would be “essential to develop socialist democracy and improve the functioning of the system of political institutions.” Through a “comprehensive . . . system of social discussions” with the public, Hungarian citizens would now be asked for their input before “political and economic decisions” were made.⁴⁰

The irony, of course, was that the fundamental decision to put the country on an austere path had already been made, and it had been made to serve the demands of the IMF and global capital holders. On July 21, Fekete tried to sell the Fund on the merits of the new package of reforms by noting it cut state spending by Ft 4 billion. The price of motor oil and gasoline had been increased two forints per liter, and the price of household energy had been raised by an average of 20 percent. The price of tobacco products had gone up 20 percent, and the average price of flour and bakery products had surged 19 percent.⁴¹ Hopefully, the Fund and “the market” would be happy.

When IMF officials returned to Budapest in August, the Hungarians pleaded for a respite from financial pressure to allow their fledgling economic and political reforms to take effect. In the delegation’s first meeting, Fekete laid out the authorities’ fears of the instability that might accompany moving too quickly. The government “needed to be careful and avoid . . . the limits of social tolerance,” he said. If too many loss-making enterprises were liquidated all at once, “there was a risk of a confrontation at the political level.”⁴² Tímár expected “200,000 layoffs” over the next two years.⁴³ Miklós Németh agreed with the Fund that further action was necessary, but he maintained that the population still “had to be convinced that there was no other option.”⁴⁴ As Thatcher, Volcker, Gorbachev, and Jaruzelski had already found, it was no mean feat to convince a country that there was no alternative to broken promises.

Parliament provided its stamp of approval in September, and Deputy Prime Minister Marjai sold the merits of the reform plan to the IMF as “complying with the demands of the foreign markets.”⁴⁵ Markets were indeed getting demanding. On his way to Budapest in early October, Fund economist Patrick de Fontenay heard in London that Japanese investors’ moment of reconsideration had finally arrived. “Hungarian paper was not selling easily in the markets,” bankers told him, because “the Japanese were beginning to reconsider their position.”⁴⁶

As happened so often during the privatized Cold War, this loss of private market confidence provided public actors with a chance to decisively intervene. On the same day de Fontenay learned of Japanese banks’ growing doubts, the West German government of Helmut Kohl announced a new, state-sponsored loan of DM 1 billion to Hungary. Since late 1986, West German officials had watched Budapest’s financial deterioration with growing concern for the damage it might do to the cause of Hungarian reform. As 1987 progressed, they resolved to finalize the new Milliardenkredit at a moment that would maximize its support for the reformers in Budapest.⁴⁷ That moment arrived when Prime Minister Grósz traveled to Bonn to meet with the leaders of West German politics and finance in October 1987. In an unspoken quid pro quo for the loan, Grósz signed a declaration committing his government to respect the rights of the German minority in Hungary and agreed to the opening of a new German cultural center in Budapest. This declaration landed as a “shock” in the Eastern Bloc and a “sensation” in the global financial world because of the growing West German power over Hungary that it portended. Eastern Bloc leaders may not have been pleased, but global capital holders took solace in knowing that the Hungarian government had a new patron in Bonn.⁴⁸ For the moment, at least, Hungarian finances were safe under the shield of the Federal Republic.

The relief was brief, however. Despite its largesse, the Kohl government still expected Budapest to soon come to terms with the IMF.⁴⁹ So the effort to prepare Hungarian society for further austerity needed to continue. While Hungarian financial officials progressed through their summer of discontent in 1987, Imre Pozsgay was busy building on his vision of democratizing society and the state in the service of economic transformation. On March 15, 1987, he spoke at a rally of nascent opposition groups commemorating the nation’s revolution against Austria in 1848—the first opposition rally ever legalized by the authorities.⁵⁰

In September, the PPF published an “action program” aimed at supporting the Program of Stabilization and Evolution making its way through parliament. The preface to the program declared that “as the institution for societal dialogue,” the PPF was “prepared to serve as a forum for the broadest possible political activity that is necessary.” This broadening of the political role of the PPF was required because “there is a need to establish a consensus.”⁵¹ In pursuit of these goals, Pozsgay gave the introductory lecture in the fall of 1987 at a meeting of 150 writers and intellectuals in Lakitelek to discuss ways out of the crisis. This group would go on to become the Hungarian Democratic Forum (MDF), the political party that won the 1990 democratic elections, but in the fall of 1987, it was a group of intellectuals with an inchoate vision of reform and little support among the population. Pozsgay aimed to raise their profile. With his endorsement, the group issued “the Lakitelek proclamation” at the end of the meeting, calling on the government to open a dialogue with society; it was published in one of the country’s leading newspapers, Magyar Nemzet, in November.

Although the reformers’ belief in the power of pluralism to bring about social consensus was sincere, a more cynical strand of thought also underlay their interest in democratization: to compensate for the unpopularity of austerity, the authorities embraced political liberalization as a means of padding their standing among the populace. This is the explanation for liberalization Hungarian officials most often gave to IMF officials in Washington. Miklós Németh, for instance, told IMF officials in 1988 that because “there was no room for any increase in the standard of living for the next three to four years . . . the authorities wanted to compensate [for] the pressure in the economic field by ‘increasing freedom of choice in the political field.’”⁵² Broken promises were difficult pills for society to swallow, and Hungarian officials hoped the elixir of political liberalization would help them go down more easily.

In January 1988, the IMF and the Hungarian government at last came to terms on a standby agreement, but the road had not been easy. Throughout late 1987, Fund officials kept the pressure on their Hungarian counterparts to impose more discipline. The hot-button issue that December was raising the government-determined interest rate on housing loans, which augured political revolt in the minds Hungarian officials. Time and again, Fund officials told their interlocutors the rates needed to be raised, and time and again their Hungarian counterparts agreed in principle but refused a change in practice. “Too politically sensitive” was the common refrain.⁵³ Prime Minister Grósz feared that the country might “collapse under its burdens.” Despite the government’s efforts to use the press “to prepare public opinion,” he said, “the changes taking place were considerable and the population had not been sufficiently prepared for them.”⁵⁴

The key to escaping the gap between creditors’ demands for adjustment and the population’s resistance to austerity lay in the IMF’s bank account. Hungarian officials told the IMF that the larger any potential standby agreement with the Fund was, the easier it would be “for the Hungarian negotiators to justify to the politicians the measures they had agreed to.”⁵⁵ So more money is precisely what the IMF used to achieve its goals. By increasing the standby amount, the Fund broke Hungarian resistance to the agreement’s package of reforms.⁵⁶ And quite a list of reforms it was: the freeing of 50 percent of prices, a commitment to reform the wage system and legalize joint stock companies in 1988, limits on domestic credit issued by the NBH, a ceiling on the budget deficit, and quarterly increases on bank deposit interest rates. In addition, Budapest committed to undertaking a 5 percent devaluation of the forint before the IMF Executive Board approved the agreement in May.⁵⁷ In return, Hungary received some $350 million in IMF loans and held on to access to international credit markets by its shoestrings.⁵⁸

Strong adjustment ensured difficult politics. Most importantly, it was clear to all in the reformist camp that their cause could not ultimately prevail while Kádár remained at the top of the party and state. So, in early 1988, Grósz and his allies launched a campaign to remove him from office. At an exceptional party conference held May 20–22, 1988, the party sent Kádar into retirement, elected Grósz to take his place, and filled the Politburo with reformers like Németh, Pozsgay, and the original architect of the New Economic Mechanism, Rezső Nyers. At the conclusion of the conference, the party criticized itself for avoiding the challenge of breaking promises. The former leadership had “misjudged the process of change that has taken place in the world economy,” party leaders now told the country. They had thought the challenges of “rolling back inefficient production” and “dismantling subsidies” were “avoidable.” But in a new lexicon that signaled the momentous change afoot, the party now assured the country it would foster a “socialist market economy” to solve the nation’s many challenges and bring about “socialist pluralism based on the leading role of the party” in politics to support the economic reform program’s implementation.⁵⁹

What this rhetoric meant in practice remained to be seen. In June, the government passed a new freedom-of-assembly law that was supposed to enhance the ability of social groups to freely congregate and advocate for change. But which groups and what changes went unsaid. Society began to find out when, in late June, thousands of people gathered in Budapest to demonstrate for two very different reasons: to commemorate the anniversary of the execution of Imre Nagy, leader of the country’s 1956 uprising, and to protest the Romanian government’s treatment of its Hungarian minority. The first cause posed an existential threat to the legitimacy of the ruling party, while the second promised to use Hungarian nationalism to increase the government’s popularity. Unsurprisingly, then, security forces violently cracked down on the Nagy commemoration, but they actively encouraged the protest against Romania. This was political pluralism stage-managed for public consumption. As the West German embassy noted, Hungarians had now been given “certain civil liberties,” but those liberties were “precisely dosed” to serve the state’s purposes.⁶⁰

As with all treatments, it was important to get the dosage of political and economic liberalization just right if communist Hungary was to return to health. But in 1988, this proved a greater challenge than the party’s reformers initially envisioned. On the economic front, officials wasted little time in molding the domestic economy on paper to conform to the performance criteria the IMF had tied to the January standby agreement. In July, they devalued the forint yet again, and throughout the summer and fall, they crafted laws liberalizing the wage system and legalizing all forms of ownership. These efforts resulted in a new Law of Associations that began the privatization of the Hungarian economy and opened the country to foreign investment in early 1989.⁶¹ In the fall of 1988, the government also announced plans to eliminate half the state’s consumer and producer subsides—some Ft 110 billion—over the next three years. Opening the country to foreign competition through trade liberalization soon followed.⁶²

But Hungarian officials ultimately proved better at talking about economic discipline than actually imposing it. As always, the social and political side effects of reform worried policy makers in Budapest. Liberalizing wages meant running the risk of inflation, and liberalizing ownership, cutting subsidies, and opening the country to foreign competition meant inviting mass unemployment. As Grósz told the IMF over the summer of 1988, “If imports were liberalized half of Hungary’s industry would collapse.” Though he thought this “would not be a major loss” from an economic point of view, it “was not something one could let happen overnight” for political reasons.⁶³ For this reason, Hungarian officials proved reluctant to see their policies through to their socially disruptive conclusion. Few enterprises were actually forced into bankruptcy, and unemployment remained much lower than the 200,000 people that many officials feared would one day come.⁶⁴ This saved Hungarian society from the worst social side effects of economic transformation but also left the IMF unimpressed and did little to alter the economy’s basic downward trajectory. Only one point of economic reality changed substantially in 1988: the price level. Inflation rose at an annual rate of 18 percent, while real wages declined by 10 percent, creating deteriorating conditions among the working class that were ripe for political opposition.⁶⁵

By late 1988, a growing list of opposition political parties stood ready to capitalize on the population’s discontent. As part of its attempt to build “socialist pluralism,” the party legalized the formation of new political parties in November 1988. The opposition’s ranks did not take long to fill out. A year after its first meeting at Lakitelek, the Hungarian Democratic Forum became an official party in the fall of 1988. Not long after, liberal opposition leaders formed the Alliance of Free Democrats, and the “historical parties” that had only nominally existed during the period of one-party rule stepped out of the communists’ shadow and began to cut an independent figure on the political scene. Last but not least was the League of Young Democrats, known as Fidesz, a band of student radicals led by a young spokesman, Viktor Orbán. Together, these new parties had little interest in playing the role of loyal opposition to the communist state, and they used the population’s growing material discontent to build power bases of their own.⁶⁶ As an IMF official reported to Washington at the end of 1988, “Political liberalization . . . which was initially aimed at making relative austerity more easily tolerated, has brought to the surface demands by various groups and interests, which the government is finding it difficult to resist as it seeks popular support.”⁶⁷

Clearly, for those in the Hungarian leadership who had hoped to use a controlled political liberalization to legitimize austerity, the dosage of economic and political reform administered to Hungarian society in 1988 had not been right. The party had not found the will or the way to impose enough austerity and structural adjustment to fix the domestic economy or resolve the country’s debt crisis, and it had let political reform progress far beyond its control. Most importantly, despite the country’s meager economic results and increasingly tumultuous politics, the reformers knew that the worst social effects of the economy’s restructuring were still to come.⁶⁸

As the horizon of the country’s future darkened, Károly Grósz realized his political career would be best served by letting someone else take the fall for the mounting economic hardships. In November 1988, he resigned as prime minister (while retaining his role as party secretary) and handed the post to Miklós Németh. Upon assuming office, the young technocrat believed his cardinal task was crystal clear. “My job,” he later recalled, “simply was to save the country from bankruptcy.”⁶⁹ One of his first decisions was to order the removal of the “Iron Curtain” barbed wire fence that separated Hungary from Austria and prevented Eastern Europeans from escaping to the West. This decision would have a profound effect on the end of the Cold War, but it was not motivated by Cold War considerations in the slightest. Instead, Németh eliminated the fence as part of his broader effort to limit hard currency imports and craft an austerity budget that would conform to the IMF’s demands.⁷⁰ As 1989 dawned, the pressure to break promises was now directly driving political change in Hungary and across the Cold War.

In the history of Hungary’s democratic transition, the story of 1989 is well known and widely shared. On January 28, Imre Pozsgay publicly declared the events of 1956 to be a popular uprising rather than a counterrevolution, as the party had long maintained. This immediately threw the party’s legitimacy into question, and the leadership soon responded by announcing its openness to holding controlled multiparty elections through which it would still retain a leading role in the country. To pull off such a feat, the party would need to find partners among the opposition, so it immediately began searching for parties that might join it in a ruling coalition. Like Solidarity in Poland, the vast majority of the opposition forces had little interest in being used by the communists to legitimize unpopular policies, so in March they banded together to form the Opposition Roundtable to coordinate their negotiations with the Communist Party. Unable to divide the opposition, the communists were then forced to negotiate with the Opposition Roundtable at the National Roundtable, which opened in June and dragged on until September. All the while, popular protest grew in the streets, as a mass demonstration on March 15 drew 100,000 people to press for political change. The ideological end of communism came on June 16, when over 200,000 people flooded the streets of Budapest to attend the reburial of Imre Nagy. No longer depicted as a traitor to his country, Nagy was now universally recognized, by both the opposition and the reform communists, as a national hero. Nagy’s veneration also served as the party’s repudiation, a fact made abundantly clear by the communists’ implosion as a political force over the remainder of the year. Wrangling over details delayed the elections until the spring of 1990, but when they came, they were fully free and resulted in the first noncommunist government in Hungary since the start of the Cold War.⁷¹

A historical inquiry focused on the coercion of creditworthiness does not contest the importance of the people or events that defined Hungary’s 1989. But it does uncover new causes and consequences of the political transition that took place that year. Just like the Communist Party’s political liberalization efforts in late 1986, its halting embrace of multiparty elections in 1989 served the ultimate purposes of legitimizing austerity and allowing the party to escape blame for breaking promises. Regardless of the election’s outcome, its social, economic, and financial consequences had been determined long before a single vote was cast. No matter who won or lost the election, economic discipline would follow in its wake.

The history of January 28, 1989—the day Pozsgay shook the Hungarian political world with his reevaluation of the events of 1956—serves as an important example of the shift in perspective that comes with focusing on broken promises. At the same time Pozsgay was delivering his explosive statement on Hungarian radio, Károly Grósz was meeting with the IMF’s managing director, Michel Camdessus, on the sidelines of the World Economic Forum in Zurich, Switzerland. If Pozsgay’s statement had enormous implications for Hungary’s past, Grósz’s meeting had equally large implications for the country’s future. Grósz had gone to Zurich to meet with the world’s financial elite and update Camdessus on his plans for Hungary. Ever since Fekete had raised the possibility of a three-year program with Fund officials in 1987, the Hungarian leadership had remained interested in negotiating one. But a three-year program—titled an Extended Fund Facilities (EFF) in the IMF’s vernacular—would come with more stringent structural adjustment and austerity measures attached to it, and IMF officials consistently doubted Budapest could deliver the wrenching domestic changes that would be required. Grósz came to Zurich to tell the managing director that his country would soon be ready. His government “would hope to move to an EFF for the calendar years 1990–92,” he said.⁷² IMF officials still had their doubts, but if Grósz could deliver enough domestic discipline to comply with the current standby agreement, perhaps a long-term agreement could be worked out.⁷³

One week later, Grósz was back in Budapest for the Politburo meeting at which the leadership decided to embrace multiparty democracy. It is clear from the archival record that the country’s looming economic hardship weighed heavily on their deliberations. Knowing full well what he had recently discussed with the IMF, Grósz set the terms of the discussion with cold political calculation. “I can picture the transition period in two phases,” he began. “The first phase would come to its end . . . at the end of 1990. . . . The second phase would be the period between ’90 and ’95.” He continued, “The first phase . . . is going to be around the elections of 1990. The real test comes after the elections and not before them.” Grósz believed it would take some time for the population to weigh the merits of each political party. “The [economic] crisis period would be ’92–’93 when everyone is going to be weighed, and put in their places in the political structure, and that is when the MSZMP will be weighed as well—does it have a solution to the crisis, does it have a program to put an end to the crisis, and so on and so forth.” Rezső Nyers interjected that the transition “will only change the players in the crisis.” “That is it,” Grósz replied. “It will not be a solution to the crisis in itself.”

Imre Pozsgay accepted the introduction of a multiparty system because the party had “not managed to create pluralism along with the single-party system,” as they had envisioned back in May 1988 when they removed Kádár from power. Nyers attributed this inability to the fact that the economic crisis had been more severe than previously thought. “I think in May we had been optimistic concerning the time and the manner of resolving the crisis. It can be seen that [the crisis] is deeper. I agree with comrade Grósz that . . . it will probably be by ’95 or the beginning of the ’90s that this crisis can be resolved, until then we are going to be a society managing crisis, an economic crisis.” For this reason, Nyers believed elections needed to come soon. The political crisis, he said, “must not last as long as the economic crisis, because that would cause a collapse.” Building on the idea of Grósz’s two phases of transition, Nyers said that after the first phase was complete, “economic crisis management would go on.”

At this point, the party leadership’s vision for the elections was still not a completely free competition of political parties. Pozsgay argued, “We should aim at a hegemonic position . . . it should be guaranteed in the first round through some kind of . . . compromise and we should face open competition only in the second round.”⁷⁴ Everyone else agreed on this strategy, and soon the party publicly endorsed multiparty elections.

Clearly, with the Hungarian Democratic Forum winning the 1990 election, this vision of a hegemonic position within a multiparty system was never realized. The opposition’s efforts between February 1989 and March 1990 can be understood as a successful struggle to force the communist leadership to move the openly competitive elections up from 1995 to 1990. This was by no means a meaningless difference, but the struggle that transpired during 1989 was over the question of when, not whether, fully free elections would happen. As Grósz told Gorbachev in a meeting in Moscow, “Events in Hungary have lately accelerated. Their direction is according to our intentions, while their pace is somewhat disconcerting.”⁷⁵

For financial officials within the NBH, the Ministry of Finance, and the IMF, the importance of the election was of an entirely different order. Who won the election or whether it was fully free was immaterial. As Nyers had said to the Politburo, the vote would merely “change the players in the crisis.” Instead, the value of the election lay in the unique opportunity it presented to legitimize the politics of breaking promises and agree to a three-year program with the IMF.

First, however, the country had to actually reach the election without falling into bankruptcy. At the start of 1989, relations between Budapest and the Fund were in the midst of yet another cycle of pressure and accommodation, with Hungary failing to meet a number of performance criteria in their standby agreement and Fund officials attempting to find ways to redefine the criteria so Hungary would not lose the market’s confidence. The particular reform measures at issue in 1989 do not need to be recounted here. In November 1989, an IMF official summed the year up nicely for our purposes. “1989 was a bad year for Hungary,” he wrote to the managing director. “This is due to the Government’s preoccupations with political developments at the expense of the management of the economy.”⁷⁶ The reason was clear enough: 1989 had become an election year. Ministry of Finance officials told the IMF that Hungary’s proliferating political parties “generally agreed that the size of the state’s activities . . . should be reduced.” But “while Parliament generally endorses this idea in principle, it has failed to provide any specifics . . . . Nor have opposition parties articulated any specifics, given that it would most likely weaken their position in the upcoming election.”⁷⁷ With these electoral dynamics in play, it was clear to all involved that 1990 would be “a more important year” than 1989 for delivering economic discipline.⁷⁸

In order to get the country to 1990, though, the IMF had to go to dramatic lengths to keep Hungary in the good graces of capital markets throughout 1989. After putting immense pressure on Budapest in 1987 and 1988 to undertake reforms, the Fund changed its tune to one of accommodation in 1989 to ensure the success of the political transition. Everyone knew that one pessimistic sign from the Fund would cause an immediate financing crisis that would lead to the county soon becoming insolvent. Insolvency would harm the hopes of political reform or might dash them altogether, so with the encouragement of Western governments, the Fund bent its rules throughout the year to prevent a deterioration of Hungary’s creditworthiness.⁷⁹ The most serious Hungarian transgression surfaced in November 1989, and the Fund worked to minimize the damage to the country’s creditworthiness. On November 20, Hungarian financial officials informed the IMF they had been continuously underreporting the level of their foreign debt by about 10 percent since the late 1970s. Under normal circumstances this was a serious offense, and Hungary could have faced stiff punitive action from the Fund. But upon learning of the underreporting, Fund officials’ immediate concern was to ensure that the news did not rattle the investors in Hungarian debt.⁸⁰

Thus, the IMF’s effort to maintain nonmonetary cooperation with Hungary was itself a form of financial assistance from the West. The mere fact of Hungary’s unbroken association with the institution kept global capital in Hungary when it was ready to run at the first sign of trouble. This was not a direct form of assistance from Western governments or global financial institutions. But it was the use of Western financial prestige, embodied in the institutional weight of the IMF, to prevent a financial crisis in Hungary during the uncertain months of its political transition.

It was only a temporary reprieve, however. The IMF was only willing to hold the markets’ pressure for structural adjustment at bay until the elections were complete. Thus, by the summer of 1989, the attention of both the Fund and Hungarian officials turned to negotiating the reform package the new government—whatever its political stripes—would use its legitimacy to implement. This meant drafting a three-year EFF agreement. During a Fund visit to Budapest in August, Ferenc Bartha, now governor of the NBH, told the IMF that the government had already discussed a medium-term program covering the three years out to 1992. A consensus had been reached, he said, on “reform measures tackling . . . the problems of ownership, budgetary reform, monetary reform and decentralization of the banking system, development of a capital market and the restructuring of trade with the West and CMEA [Comecon] intended to foster the integration of Hungary in the world economy”—in other words, the entire national economy. “It would be desirable,” he said, “to reach understandings with the Fund on a medium-term agreement covering these issues which could be implemented by a government which would emerge from the pending elections.”⁸¹ In a later meeting, Hungarian officials told the Fund, “The program could only be approved after the pending elections,” but “whatever government emerged from the elections had little choice but to implement a program of market oriented reform, with a strict monetary regime and a reduction in the role of government.”⁸²

This was bad news for Hungary’s nascent opposition movements. By the late 1980s, Hungary had a hard currency foreign debt of roughly $19 billion and an annual budget deficit ranging from Ft 30 billion to Ft 60 billion year to year. Until 1987, these figures were considered top secret and were restricted to senior leaders in the Politburo and a narrow section of the financial bureaucracy. Society at large had no understanding of the nation’s financial position. An important part of the political liberalization launched in 1987 was informing the country of the nation’s real financial state. One newspaper described the population as “shocked” when the numbers were made public.⁸³ Not one to sugarcoat a situation, Miklós Németh told the country in a 1989 nationally broadcast interview, “The interest burden, to mention only this, last year and this year amounts to $1.2–1.3 billion. . . . This is a burden to the country. And we have to accept this burden in order to maintain our solvency.”⁸⁴

This conclusion went virtually unquestioned by all of Hungary’s new political parties. Two convictions defined the discussion about the national debt after it became a topic of public conversation in 1987: the debt was part of a global phenomenon, and the debt had to be repaid. In a 1988 article, “The State as Debtor,” Istvan Garamvolgi wrote, “This decade we have been witnessing the explosion of debt in most countries of the world . . . mounting national debt is a worldwide phenomenon.”⁸⁵ János Kis, a prominent member of the opposition Free Democrats, believed that the global nature of the debt problem made the future course of Hungarian development easy to predict. “Let us not forget,” he wrote, that “Hungarian crisis processes emanate from Hungary’s Western financial dependence. In this respect Western creditors will exert pressure, [and] the International Monetary Fund will offer package plans for the limitation of consumption.” The point of comparison for Hungary’s future was clear. “In brief: the West will mean to Hungary what the United States means to the masses of less fortunate Latin American countries.”⁸⁶

Ironically, Kis’s party, the Alliance of Free Democrats, was both the most promarket political party and the only party to even consider asking the international community for debt relief. In an August 1989 article, Tamas Bauer and Marton Tardos, the party’s leading economists, wrote, “Hungary may be able to manage its current debt burden for quite some time. It can do so, however, only at the price of further increasing the frightening impoverishment of part of the populace.” Bauer and Tardos believed—and had the courage to say—that the Volcker Shock and Reagan financial buildup bore some responsibility for Hungary’s debt. It was “an unquestionable fact,” they wrote, “that high and unpredictably fluctuating interest rates were caused by budgetary deficits in certain Western countries.” Therefore, “the financial pressure choking the Hungarian economy cannot be lifted by granting credit alone.” Instead, “a reduction of the accumulated debt service” and “a reduction of interest” were required.⁸⁷

With such views percolating in society, the NBH was not going to leave anything about the opposition’s economic and financial views to chance. Bank officials led a coordinated effort to ensure that all political parties viewed Hungary’s international debt obligations and plans for structural reform as unbreakable promises. In an August 1989 interview, NBH president Bartha reported that he and his team had recently met with all leading opposition parties. He stated, “We tried to persuade them to include requirements for a strong central bank . . . in their demand, and told them to regard a tight money policy as a measure in the interest of the entire nation. We tried to convince them not to consider the rescheduling of loans and further increases in the indebtedness as passable.” The debt represented the accumulated actions of the nation’s past, Bartha believed, and the new government could not simply walk away from those actions. “We assume responsibility for the past,” he said.⁸⁸

With the opposition’s views under control, there was just one problem left by the fall of 1989 for the financial policy makers of the NBH and the IMF: the elections kept getting pushed back due to pesky political quarrels, and the country was running out of money. After having initially been moved up to fall 1989, election day had since been moved back a number of times and was now planned for March 1990. At the end of September, Bartha projected that the country would face a financial crisis in early 1990 unless it received the three-year EFF. But with all the important structural adjustments postponed until a new government took power, the IMF would not grant the EFF until the perpetually deferred election actually took place. Officials projected that the country would need to borrow $1 billion in the first quarter of 1990 and that without an EFF program the NBH likely would not be able to find such funds.

This put in motion the endgame of Hungary’s communist period. In late 1989, the European Community provided a $1 billion bridge loan to “tide Hungary over” until the spring election and made the loan contingent on the current communist government coming to terms with the IMF on yet another standby program before the election.⁸⁹ When an IMF team arrived in Budapest in December 1989 to negotiate the new standby, Fund officials gave up waiting for the elections and demanded that the current government take a series of steps immediately. The government needed to announce cuts in housing subsidies, increase interest rates, and provide “a list of enterprises against which liquidation procedures had been initiated.” Unless it took these measures by January, Fund officials told their Hungarian counterparts, the IMF would not agree to a financing program.⁹⁰ With no other option available, Hungarian authorities devalued the forint by 10 percent, increased interest rates, and passed a housing reform program that increased the average rent by 35 percent in December 1989. In January 1990, the authorities cut enough subsidies and freed enough prices to institute a 10 percent increase in the consumer price level while also accelerating the closure of loss-making enterprises.⁹¹ These rounds of brutal austerity caused László Kézdi, the Budapest pensioner we met in this book’s opening pages, to write his biting public letter to the Hungarian authorities.

In exchange for these broken promises, the Fund team agreed to submit the standby agreement to the IMF Executive Board before the March election. To ensure that the new government upheld the standby agreement, however, the Fund made each batch of loans beyond the first “subject to a review which would ensure that the new government endorses the program.”⁹² And so, one week before József Antall and the Hungarian Democratic Forum won the first free election in Hungary since the start of the Cold War, the IMF Executive Board approved an agreement that set the course of the Hungarian economy regardless of the election’s outcome.

In May, the managing director visited Hungary and met with Antall, the new prime minister. Antall told Camdessus that “the Government was determined to proceed with reform and that it would be done with appropriate speed but not overnight.” To which Camdessus predictably replied, “While the appropriate speed would have to be determined in light of each country’s circumstances (including political and historical factors), a minimum critical mass was needed at the outset and there were costs to being too gradual.”⁹³ Clearly, the pressure to break promises had not subsided. Instead, the players had merely changed.

By November 1990, the Antall government had formulated its medium-term reform program, titled the Economic Program of National Renewal. Hungarian officials told the Fund that “strengthening Hungary’s creditworthiness” was one of the primary goals of the program. “To this end,” they wrote, “the Government is placing great emphasis on privatization, the reduction of the role of the state in the economy, and the strengthening of market mechanisms.”⁹⁴ After further rounds of negotiations, the Fund and the Antall government signed an agreement for a three-year EFF in February 1991. Almost four years after PlanEcon had published its warning about the financial crisis looming in Hungary, a Hungarian government had agreed to a long-term structural adjustment program aimed at maintaining the market’s favor. What PlanEcon and the rest of the world did not foresee in 1987 was that the Hungarian government signing the agreement would be the country’s first noncommunist government in over forty years.