beyondbrics

What is going on in Hungary? Yesterday, Hungarian premier Victor Orban announced he would no longer negotiate a deal with the IMF. Then, against the better judgment of the international creditors Orban shrugged off, last night Hungarian MPs voted into law a highly contentious $900m tax on banks, which the chief of Hungary’s Banking Association said had the potential to drive 8-10 banks into the ground.

This morning, both the Budapest Index and the forint took another blow after Moody’s placed Hungary’s sovereign rating under review for a possible downgrade. The rating agency cited uncertainty about the state of the Hungarian economy.

The Budapest SE index dropped 0.8 per cent before recovering slightly on the news. The Hungarian forint fell over 1 per cent against the euro on the news. It is now trading down 0.8 per cent against the euro at 285.78.

But as Neil Shearing,senior emerging markets economist at Capital Economics told beyondbrics this morning, Moody’s downgrade, which is likely to go through, and the short term market turbulence is just a smaller part of a much larger issue – whether the government is willing to negotiate with the IMF. “We don’t think Hungary can get away [with economic recovery] without going to back to the IMF.” Last night’s parliament decision to implement the monumental bank tax only further complicates matters. “Unless or until the bank tax is diluted or abandoned, I cannot see an agreement with the IMF happening.”

The FT’s Chris Bryant writes from Budapest:

Hungary’s prime minister has vowed to restore the country’s “lost economic self-rule”, rejecting a fresh deal with the International Monetary Fund and resisting calls for more austerity.

The monumental tax – three times the size of any other European bank levy currently under consideration – has caused creditors to warn it will stifle growth and cool investor confidence. It is a political decision that comes at the expense of market volatility.

As Chris pointed out two weeks ago:

Analysts think Mr Orban’s increasing belligerence is aimed mainly at a domestic audience. The centre-right government scored a landslide poll victory in April, but is now looking towards municipal elections in October. Its biggest challenge is set to come from Jobbik, a nationalist, anti-foreign capital party.

Shearing says he doesn’t see the Orban government going back to the IMF until post elections – possibly not for another six months. This could mean an extended period of financial volatility for all things Hungary related.

What is going on in Hungary should be a lesson to all: politics and economics do not mix.

Related reading:
Hungary passes bank tax, despite criticism, The New York Times Dealbook
Hungary: forget the rhetoric, watch the bank tax, FT beyondbrics
Hungary: big bank tax could clobber little insurance brokers, FT beyondbrics