Hungary Replies to EU, Sees More Debate on Road to Bailout
Hungary sent its reply to the European Commission on the European Union executive’s infringement procedures in three areas, including monetary- policy independence, in an effort to revive talks on a bailout.
The reply addressed the independence of the central bank and the data-protection authority as well as the reduction in the retirement age of judges, government spokesmen Peter Szijjarto and Andras Giro-Szasz said in an e-mail today.
“The next step in the procedure is the evaluation by the Commission of the responses provided,” according to the statement. “Previous experience shows that we can expect an objective, impartial, professionally and legally sound analysis from the Commission.”
Hungary can’t begin formal talks until it meets EU and International Monetary Fund demands to change a disputed central bank regulation, which led to the suspension of talks in December. The 27-member bloc also requested changes to overhauls of the judiciary and data-protection ombudsman’s office.
Prime Minister Viktor Orban reversed a policy of shunning international aid in November as the forint fell to a record and the country’s sovereign-credit grade was cut to junk. A month later, he said reaching an agreement “isn’t so significant.” On Jan. 5, he said he wanted a “quick” agreement after the forint fell to a record.
The forint has risen 10 percent against the euro since Orban’s pledge, making it the best-performing currency in the world in the period. The currency rose 0.3 percent against the euro to 290.25 at 3:22 p.m. in Budapest. It strengthened as investors poured money into emerging markets. The MSCI Emerging Market Index of shares has rallied almost 16 percent this year.
Hungary remains a “positive idiosyncratic story,” Luis Costa, a London-based currency strategist at Citigroup Inc., said in an e-mail today. The “central assumption” is that Hungary will obtain a bailout in the second quarter, which may support further improvement in Hungarian risk, Costa said.
In its reply to the EU, Hungary also addressed concerns about the functioning of the judiciary and the “situation of the media,” in addition to the three infringement cases, according to the government statement.
The government expects “further debate” with the European Commission about cutting the central bank president’s salary and his oath of office, Deputy Prime Minister Tibor Navracsics said yesterday, according to state news service MTI. On the judicial overhaul, the government would allow judges to work past the new retirement age “in certain cases,” MTI said.
That suggests Hungary’s start of formal talks on a loan with the IMF and the EU may be delayed as a rally in local assets reduces pressure on the government to reach an agreement, according to Daniel Bebesy of Budapest Fund Management.
“The market had forced the government to change course in the first place and as market conditions improve, I sense that the government doesn’t feel the same pressure to come to an agreement,” Bebesy, who helps oversee $1.5 billion, mostly in Hungarian government bonds, said in an interview today.
Hungary may be pressed to meet debt-payment obligations this year if the euro crisis worsens and economic growth misses the government’s 0.5 percent forecast, the IMF said on Jan. 25, underscoring the need for a financial safety net.
The IMF is considering a cut in its 0.3 percent growth estimate for Hungary for this year, Iryna Ivaschenko, the lender’s representative in Budapest, said on Feb. 9.
The central back unexpectedly held the benchmark interest rate unchanged last month at 7 percent, the highest level in the EU, in a four-to-three vote, with the majority saying that the improvement in country risk will last.
Hungary should keep borrowing costs unchanged until the government reaches an agreement with the IMF, which may allow rate cuts, policy makers Ferenc Gerhardt and Gyorgy Kocziszky said in an interview on Feb. 15.
Negotiations are “unlikely to be as smooth as many now seem to expect,” William Jackson, a London-based economist at Capital Economics Ltd., said in an e-mail today, citing the government’s “significant credibility gap.”
“Accordingly, we would not be surprised to see a fresh spike in investor risk aversion put Hungarian assets under renewed strains this year, resulting in further defensive interest-rate hikes,” Jackson said.
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