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Orban Bows to Pressure as Hungary May Compromise in EU Feud

Hungary's Prime Minister Viktor Orban
Hungary's Prime Minister Viktor Orban. Photographer: Balint Porneczi/Bloomberg

Hungary bowed to mounting pressure from lenders and regulators as Prime Minister Viktor Orban signaled he would compromise over disputed laws that halted bailout talks, boosting the country’s currency and stocks.

“I’m only tough when the interests of my country require me to be and I compromise when the interests of the Hungarian people require me to do so,” Orban told reporters in Strasbourg, France, yesterday. The government is ready to “entirely rework” two temporary provisions of the constitution that took effect Jan. 1 if the EU requests, he said.

Orban is trying to revive bailout talks with the European Union and the International Monetary Fund after discussions broke down in December over Orban’s refusal to change a central bank law that the institutions said may weaken monetary-policy independence. The EU also threatened a lawsuit against Hungary for encroaching on the central bank’s independence and political meddling with the judiciary and the data-protection authority.

The forint strengthened for a third day, gaining 0.9 percent to 302.35 per euro by 12:20 p.m. in Budapest, its strongest since Dec. 21. The benchmark BUX stock index fell 0.1 percent to 18,126.37 after jumping 3.1 percent yesterday.

‘Right Rhetoric’

“The Hungarian prime minister continues to provide the right rhetoric,” Simon-Quijano Evans, economist at ING Groep NV in London, said in a report today.

The cost of insuring Hungarian debt against non-payment for five years using credit-default swaps dropped to 663 basis points from 691 basis points on Jan. 17, reaching the lowest in more than two weeks, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers. The gauge reached a record 735 basis points on Jan. 5.

Orban told European Parliament lawmakers yesterday in Strasbourg that he sent a letter to European Commission President Jose Barroso, showing his desire to work out an agreement.

Hungary and the EU’s executive arm disagree on one last point regarding central bank independence, namely whether the bank’s president and members of the rate-setting Monetary Council should be asked to take an oath on the Constitution, Orban said, adding that he’ll consider the issue.

‘Easily, Simply, Fast’

“I’ve expressed my opinion that the issues raised by the commission can be solved easily, simply and fast,” he said. “I hope for swift results from our meeting next week” with Barroso, he said.

Hungary has become a test case for democratic principles and economic-policy rules in the EU, forcing the Commission to make good on a pledge to use all its powers to enforce the 27-nation bloc’s norms. The country, which isn’t part of the euro area, risks compounding the two-year-old European debt-crisis centered on the single currency.

Hungary disagrees with the Commission on the lowering of the mandatory retirement age for judges, government spokesman Andras Giro-Szasz said today, adding that the EU is “fundamentally wrong” to consider the decrease of the retirement age as early retirement.

“Risk aversion towards Hungary will remain high until formal talks begin,” Mai Doan, a London-based economist at Bank of America Corp., wrote in a research report today. An agreement with the international organizations may materialize by the end of March or in the second quarter, Doan wrote.

‘Weak’ Hungary

Hungary, which is “weak and has a high debt level,” wants a “precautionary instrument” rather than drawing funds from the EU, Orban said.

“We’re willing to sell our bonds even with a higher interest rate rather than use cheap European money,” he said.

Orban said he expected financial aid talks with the two international institutions to involve “grave” economic issues.

The IMF may require Hungary to change its flat personal income tax as part as part of a bailout agreement, according to a person familiar with the Washington-based lender’s preparations for the talks. The flat tax will be an important part in any program discussion and the Hungarian levy being regressive is the main issue, said the person, who declined to be identified because official talks haven’t started.

Orban introduced the flat tax, a cornerstone of his economic policy, last year to simplify tax administration, boost growth and reward higher-income earners. The measure contributed to a decline in government revenue and an increase in the structural budget deficit.

‘Tangible Steps’

Hungary will have to show “tangible steps” on economic policy before the IMF can determine “when and whether to start” aid negotiations, IMF Managing Director Christine Lagarde said on Jan. 12 after meeting Hungarian chief negotiator Tamas Fellegi in Washington. The government didn’t take “effective action” to rein in its budget deficit as Orban’s measures weren’t of a “sustainable nature,” the European Commission said on Jan. 11.

The Cabinet pledged to keep the budget deficit within 3 percent of gross domestic product this year and in 2013.

Hungary wants to start negotiations with the IMF and the EU “as soon as possible,” Economy Ministry State Secretary Zoltan Csefalvay said yesterday.

The country would abandon a plan to merge the central bank and the markets watchdog should the Commission request it, Orban said. Barroso told the same session of European lawmakers that he called on Orban to address concerns about new Hungarian laws “in a determined and unambiguous way.”

‘Bow Anyway’

“We will not hesitate to take further steps if deemed appropriate,” Barroso said.

The Hungarian Cabinet is ready to amend regulations that haven’t changed for 20 years and haven’t drawn objections from the Commission in the past, Orban said.

“I can’t bow to the force of the arguments, but if the Commission deems it important, we’ll bow anyway.”

Hungary, which became the first EU country to receive an IMF-led bailout in 2008, shunned fresh aid in 2010 when Orban became prime minister. He reversed his policy last year as the government struggled to meet its targets at debt auctions and the forint plummeted.

The EU’s most-indebted eastern member received its third sovereign-credit downgrade to junk in the last two months when Fitch Ratings on Jan. 6 followed moves by Moody’s Investors Service and Standard & Poor’s.

‘No Alternative’

Hungary has “no alternative” to reaching a bailout agreement, Raiffeisen Bank International AG Chief Executive Officer Herbert Stepic said on Bloomberg Television on Jan. 17.

“If there was no IMF agreement then, of course, the country would in the medium-term default, which we don’t see,” Stepic said.

Hungary will have to make payments on its 20 billion-euro ($26 billion) 2008 bailout this year, with installments of about 700 million euros due in February and then the same amount at quarterly intervals, plus 300 million euros in June and 500 million euros in each of September and December, according to researcher Capital Economics.

The country also has a 1 billion-euro bond maturing in November and a smaller yen note due in July, according to data on the Hungarian Debt Management Agency’s website. Against that, the agency has deposits of 2.5 billion euros, according to Royal Bank of Scotland Group Plc.

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