Hungary’s Premier Viktor Orban retreated in his confrontation with central bank chief Andras Simor as he seeks to revive talks for an international bailout after a market rout this week. The currency and bonds gained even as the country received its third downgrade to junk.
“The president can count on the government’s support, including our backing for him personally,” Orban told reporters after meeting Simor today in Budapest. The government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank to stabilize the economy, he said.
The International Monetary Fund and the European Union broke off talks last month on Hungary’s bid for a bailout after Orban refused to withdraw a new central bank regulation the institutions said may undermine monetary-policy independence and Simor’s authority. The forint fell to a record against the euro yesterday as investors speculated an IMF accord may be delayed.
“It’s clear Orban is retreating, the question is whether it’s enough,” Peter Duronelly, who helps oversee $1.5 billion mostly in Hungarian government bonds as chief investment officer at Budapest Fund Management, said by phone today. “If EU leaders expect a total capitulation from Orban, then an agreement won’t be so simple or fast.”
The forint strengthened 0.9 percent against the euro to trade at 316.13 at 5:07 p.m. in Budapest from as low as 324.24 yesterday before Hungary’s chief negotiator, Tamas Fellegi, pledged to compromise with the IMF and the EU on a bailout.
The yield on the benchmark 10-year government bond declined to 10.1 percent from 10.4 percent yesterday. The yield rose to as high as 11.34 percent yesterday, according to generic prices compiled by Bloomberg.
The cost of insuring Hungarian bonds using credit-default swaps fell to 698 basis points today from 735 points, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers. The benchmark BUX stock index dropped 0.7 percent to close at 16,107.72.
Hungary lost the investment grade on its foreign-currency debt at Fitch Ratings today, the third such downgrade in six weeks. The assessment was cut one step to BB+ from BBB-, the company said in a statement. It assigned a negative outlook.
Standard & Poor’s followed Moody’s Investors Service on Dec. 21 in cutting Hungary’s debt to junk, 15 years after the former communist country was awarded an investment-grade rating.
“The downgrade of Hungary’s ratings reflects further deterioration in the country’s fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new” agreement with the IMF and the EU, Matteo Napolitano, a director in Fitch’s sovereign group, said in a statement.
Talks for Hungary’s second bailout in four years broke down following the central bank law that takes away Simor’s right to name deputies, expands the rate-setting Monetary Council and adds a new vice president. A separate law makes it possible to demote the central bank president if the institution is combined with the financial regulator.
The central bank law, which came into effect on Jan. 1, is “fully compatible” with EU rules, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi yesterday. The Cabinet will continue to respect the Magyar Nemzeti Bank’s independence, Matolcsy wrote.
Orban shunned the IMF since taking office in 2010 to prevent interference in what he called his “unorthodox” measures. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to tame the budget deficit and forcing lenders to swallow exchange-rate losses on foreign-currency mortgages. The EU has criticized all those policies.
Orban’s government has also reduced the power of independent institutions and asserted its influence since winning elections, bucking objections from the EU, the IMF, the U.S. and the United Nations.
Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.
‘Strong Policy Framework’
“What’s important to monitor is what conditions international organizations will impose and what the government’s reaction will be,” Levente Papa, a Budapest-based strategist at OTP Bank Nyrt., Hungary’s largest lender, said in an e-mail.
Hungary needs a “strong policy framework” and a “sound mix with strong ownership from authorities” for an international loan, Figyelo reported, citing an IMF staff report from an Article IV consultation and a post-program monitoring discussion dated Jan. 4.
“Such external support, which has been requested by the authorities, will only be available and effective to the degree it is based on a strong policy framework and a sound policy mix with strong ownership,” Figyelo said, citing the report.
The report’s recommendations include strengthening central bank independence, fiscal policy oversight, changing the tax regime, cutting extraordinary industry taxes and reorganizing public transport companies, Figyelo said. The report will form the basis of the IMF board’s discussion on Hungary on Jan. 18, according to the news magazine. The document has been sent to the Hungarian government, which may add to it.
“We have no comment on these reports or on leaked documents,” Iryna Ivaschenko, the IMF’s representative in Budapest, said in an e-mail today.
The Cabinet is ready to start negotiations on a standby loan agreement with the IMF and the European Union and wants an accord “quickly,” Fellegi, Hungary’s chief negotiator, told reporters in Budapest yesterday. The government seeks a precautionary loan to tap only if market conditions require it.
It’s in Hungary’s interest to obtain an IMF loan “as soon as possible,” Orban said after meeting Simor today. Hungary sees a “good chance” for swift talks with the IMF, Orban said.
The government will consult with the central bank on a daily basis and will work together to ensure economic stability, Orban said today. The central bank, in a statement, said it will use “available tools” to ensure economic stability.
“The government seemingly now realizes that an IMF deal would bring benefits in terms of cheaper borrowing and financing costs,” Tim Ash, a London-based economist at Royal Bank of Scotland Group Plc, said in an e-mail today before Orban’s briefing. “It is still weighing this up against the likely political costs, and hence is trying still to ensure that it can sell cutting the deal with the Fund as a victory.”
While the start of talks with the IMF may bolster the forint, the move may “well be misplaced and reversed once the government’s foot dragging then restarts,” Peter Attard Montalto, a London-based economist at Nomura International Plc., said in a report yesterday.
“We are still on first base,” Montalto said. “Investors are still underestimating the time it will take and the distance Orban will have to move on the policy front.”
After a stint as premier in 1998-2002, Orban rode a wave of discontent against the previous Socialist governments that implemented austerity measures starting in 2006 and needed a bailout in 2008.
The previous Socialist administration of Prime Minister Ferenc Gyurcsany angered Hungarians when it admitted to lying about the state of the economy to win the 2006 election, sparking demonstrations that included clashes between protesters and police in the country’s worst street violence in 50 years.
Orban swept to power in 2010, grabbing a two-thirds majority in parliament that allows him to unilaterally change the constitution. He pledged to end austerity, a promise he broke. He has been forced to raise some taxes, including the value-added tax, delay a personal flat tax plan, cut social spending and eliminate early retirement.
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