Orban Punished by Investors as Hungary Balks at IMF Talks

Hungary's Prime Minister Viktor Orban
Viktor Orban, Hungary's prime minister. Photographer: Akos Stiller/Bloomberg

Hungarian Prime Minister Viktor Orban is pushing back as investors and European officials renew their drive to force him to relax his hold on power in return for financial aid.

Pressed by a resurgent opposition party calling for Hungary to pull out of the European Union, and looking to protect his expansion of authority, Orban is retreating from a Jan. 6 pledge to quickly meet EU preconditions to negotiate financial help from the International Monetary Fund.

Investors are punishing the premier by driving up bond yields and pushing down the forint, busting a rally that began with the promise of a swift bailout deal. The loan talks have yet to begin and Orban, 48, has yet to make the necessary legal changes to reverse the greater influence his government has asserted over the judiciary and the central bank.

“The reason there hasn’t been a deal with the EU and the IMF is because the political cost is deemed to be too high for the prime minister,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest and is not related to the premier, said in a phone interview. “The government is playing for time and is trying to avert compromising to ensure Hungary’s financing.”

This month Prime Minister Orban likened the EU to Soviet oppressors and has compared his resistance to its demands to a “freedom fight.” A march organized by his supporters in January drew hundreds of thousands to protest what they called an attempt to make Hungary a colony of the EU.

EU Sanctions

For the EU, regrouping after helping euro member Greece restructure its debt, Hungary is a test case for the union’s capacity to make countries respect its democratic standards and its fiscal rules. EU leaders on Jan. 30 backed a treaty that speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. Eight non-euro countries, including Hungary, supported the accord.

“Hungary’s case is important because it provides a precedent for other countries in the EU,” Simon Quijano-Evans, a London-based economist at ING Groep NV, said in a phone interview. “This is about the EU as a whole so it is very important and everybody is watching what the Hungarian government is saying and doing.”

Investors are showing signs of losing faith in Orban’s ability to obtain IMF aid. The yield on the benchmark 10-year government bond rose to 8.96 percent today, from this year’s low of 8.4 percent on Feb. 8. The yield reached 10.8 percent on Jan. 4, the highest ever for that security.

Falling Forint

The cost of protecting Hungarian debt against non-payment for five years using credit-default swaps fell to 537 basis points today from 545 on March 23, the highest in a month, according to data provider CMA. It is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Public debt financing for this year is “more or less ensured,” Mihaly Varga, Orban’s chief of staff, said Feb. 20.

The forint may weaken to as low as 315 per euro from 294 on March 23 in part because of the delay in Hungary’s talks with the IMF, Nomura International Plc said on March 22. The currency gained 0.3 percent to 290.58 as of 10:23 a.m. in Budapest.

It has fallen 1.5 percent since climbing to the strongest level in five months on Feb. 21 after Orban’s pledge on obtaining an IMF loan. The forint plunged 15 percent, the most in the world, in the second half of last year as policies including nationalizing private pension funds and forcing banks to swallow losses on foreign-currency loans spooked investors.

Central Bank Independence

The European Commission, the EU’s executive body, has blocked the start of talks on a loan, citing a failure by Orban to bring laws in line with the bloc’s democratic norms. The commission objects to new laws affecting the independence of the central bank, the judiciary and the data-protection agency and has voiced concerns about media pluralism after Orban set up a media regulator whose directors are all ruling-party appointees.

“Progress on a deal since the start of the year has at best stalled and arguably shifted into reverse gear,” Gyula Toth, a strategist at UniCredit SpA in Vienna, said in a March 21 report.

Orban, who also served as premier from 1998 to 2002, won a two-thirds majority in parliament in 2010 that allowed him to unilaterally change the constitution and reduce the power of independent institutions. The moves raised objections from the EU, the IMF, the U.S. and the United Nations.

Supreme Court

Ruling-party lawmakers have ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, replaced an independent fiscal council with one dominated by the premier’s allies and chosen a party member to lead the State Audit Office.

Hungary won’t live by the “dictates of foreigners” and knows “the character of unsolicited comradely assistance, even if it comes wearing a finely tailored suit and not a uniform with shoulder patches,” Orban told a crowd in front of parliament in Budapest on March 15, the anniversary of the failed 1848 revolution. Orban’s spokesman, Peter Szijjarto, has denied that Orban referred to the EU in his speech.

Such language demonstrates a “complete lack of understanding of democracy”, commission spokeswoman Pia Ahrenkilde Hansen told a daily press briefing in Brussels on March 16.

Lack of Understanding?

Commission President Jose Barroso thinks “Those who compare the European Union to the USSR show a complete lack of understanding of what democracy is, in his view, and they also fail to understand the important contribution of all those who have defended and fought for freedom and democracy,” she said.

The anti-EU rhetoric may be part of a short-term strategy to persuade the union to scale back its criticism of domestic policies and to weaken extremists, Attila Juhasz, a political analyst at Political Capital in Budapest, said in a phone interview.

At home, Orban is also competing with the nationalist Jobbik party, which was tied for second place among decided voters in December before falling back to third place in March, according to pollster Ipsos. Jobbik had 17 percent support in March, compared with 41 percent for Orban’s Fidesz party, according to the poll, which had a margin of error of 2.5 percentage points.

Protesters at a Jobbik rally on Jan. 14 burned an EU flag during a rally outside the commission’s offices in Budapest as the party demanded a referendum on quitting the EU.

‘Risks to Society’

Orban’s anti-EU rhetoric in the long run is bound to lead to an increase in radicalism “with all the risks to society that it entails,” said Juhasz, an expert on radicalism.

“In the long run this kind of politics only strengthens the radical mentality,” said Juhasz. As for improving the bailout, it would be counterproductive because Orban’s maneuvering room is now narrower. Any deal now would be on “much more unfavorable terms,” he said.

The EU is showing no sign of backing off. The Commission on March 7 took a formal step toward seeking a court order to require Hungary to redraft laws on the judiciary and data protection agency and asked for more information on planned changes to a new central bank law.

A week later, the EU partially froze Hungary’s infrastructure-development aid as of 2013, giving the country until June 22 to take “effective” action to cut its budget deficit and have the sanction lifted. It was the first time such action was taken to force an EU member to meet budget targets.

Orban continues to express willingness to negotiate. Hungary wants to avoid “unnecessary delays” in the start of aid talks, Orban told Barroso in a March 13 letter, pointing to already submitted amendments showing the government’s interest in compromise.

Needs More?

“More needs to be done” to bring Hungarian laws in line with European norms, Thorbjoern Jagland, secretary-general of the Council of Europe, an inter-governmental organization that promotes democratic values, told reporters in Budapest on March 21 after meeting with Orban.

Orban’s overhaul of the courts “threatens the independence of the judiciary” and is “problematic as concerns the right to a fair trial,” the Venice Commission, the Council of Europe’s advisory body on constitutional matters, said on March 19.

While the Hungarian government says it wants a quick IMF deal, an easing of funding pressure means the government is unlikely to need to meet conditions for aid in the next three to four months, UniCredit’s Toth said.

Hungary has sufficient forint deposits to last it until August and enough foreign currency deposits until October and possibly until February of next year if accounting for inflows from the EU and the remainder of nationalized pension assets, Toth said, citing UniCredit estimates.

“We need to see a sharp and sustained deterioration in market conditions before the government considers giving into IMF and EU conditionality at any stage over the coming three to four months,” Toth said.

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