beyondbrics

The Hungarian government has to sort out the economy, find a solution to the indebtedness of both state and folk, and allow its multi-talented people to blossom. It has to do it fast, and against vested interests which are opposing this crusade. But the government will not be swayed from its course. All of which is something foreigners – including journalists – just don’t understand.

That, in essence, was the pre-Christmas message Viktor Orban, Hungary’s prime minister sent to his people, or at least his loyal followers, via a long interview in the pro-government daily Magyar Nemzet.

It all helps explain Orban’s drive – in spite of increasingly desperate appeals from European and North American allies – to steamroller a bunch of controversial laws through parliament before the New Year, laws which he maintains are needed to achieve these aims.

In particular, the Central Bank Law, which removes the right of the governor to nominate deputies while allowing the prime minister to appoint a third deputy governor and two additional members of the rate setting council.

Critics, including the European Commission’s Jose Barroso, the European Central Bank and Hillary Clinton, the US secretary of state, urged Orban to reconsider this bill, saying it crossed the line on the bank’s independence.

In defiance of these pleas, parliament in Budapest, in which Orban’s Fidesz MPs (along with their nominally independent Christian Democrat allies) hold a two-thirds majority, duly rubber-stamped the bill into law on Friday.

The new law, along with another that allows for Pszaf, Hungary’s financial watch dog, to merge with the central bank, together “endanger Hungary’s economic stability and therefore seriously harm the country’s interests,” the National Bank of Hungary stated on its website on Friday.

Foreign investors may not understand Hungary, but they understand, more or less, what is a risky investment – and that is how they increasingly view Hungary, most especially after the country called on the International Monetary Fund for “a safety net” credit line in November, only for negotiations between Hungary and the IMF-EU to break down, primarily over the central bank law, earlier this month.

The latest legislation inevitably makes an IMF-EU deal even more distant.

The markets showed negative signals on Thursday – as Hungary’s debt management agency partially pulled a forint bond issue, while yields on 10-year paper hit 9.7 per cent, Bloomberg reported.

Following parliament’s decision, the forint sagged, hitting 315.5 to the euro, down 1.7 per cent and close to record lows, in early afternoon trading. The Budapest bourse followed suit, the benchmark Bux index hit an intra-day low of 16,822, down 2.6 per cent, but recovered to close trading at 16,974, down 1.74 per cent. This takes the bourse’s losses to some 20 per cent for the year.

Foreign observers, for their part, wonder just when Orban will understand western investors.

“The stand-off between Mr Orban’s government and the IMF is endangering Hungary’s ability to maintain market access. Yesterday’s poorly received bond auction was a shot across the bows… The stand-off is escalating by the day and unless negotiations with the IMF resume and a workable agreement is reached fairly quickly, Hungary will have a full-blown debt crisis on its hands,” says Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy.

The European Commission appears to be doing everything it can to avoid stoking a crisis, and will “be assessing the legal scope of the new laws,” a spokesperson told beyondbrics, while stressing that it had reiterated concerns to the Hungarian authorities “in the past few days.”

With the New Year imminent, it’s a case of wait and see over the weekend. But Hungary should not underestimate concerns among western financiers.

Spiro says that what is, for now, a politically-driven crisis has implications regarding confidence in central and east European assets in general.

“The danger is that this spirals out of control and requires even more drastic measures to restore confidence,” he says.

And while Orban may be “clipping the wings of the central bank” in order to boost growth, it will not work.

“These proposed curbs are self-defeating since they unsettle the markets, force the central bank to raise interest rates and depress growth further,” he says.

In other words – and not for the first time on this blog – Hungary is shooting itself in the economic foot; with a sub-machine gun.

Related reading:
Hungary poised to widen rift with west, FT
Hungary: little peace at Christmas, beyondbrics
Hungary: junked again, beyondbrics
Hungary v IMF: another row, beyondbrics