Emboldened by a new European Central Bank (ECB) bond-buying plan that has boosted markets across Europe, Hungarian Prime Minister Viktor Orban has hunkered down for a drawn-out fight with the IMF, putting the country back to square one in talks on a new credit line.
Two stormy years in power have seen Orban aggravate banks and the EU, US Secretary of State Hillary Rodham Clinton and even ex-Soviet Armenia, all in aid of a political path that sets out to appeal to Hungarians’ sense of pride and independence.
Orban’s favoring of taxes on banks and big business comes as a striking alternative to the sort of liberal orthodoxy on budget cuts that has driven Greece and others into a vicious cycle of recession. However, companies and banking sector economists say the drive has crippled investment and undone some of the best reforms pushed through in the decade after the fall of the Berlin Wall.
Orban’s ability to hold public finances together increasingly depends on the outcome of a poker game with the IMF, Brussels and financial markets over an aid deal the prime minister insists would only ever be “precautionary.”
By building confidence in the eurozone and its periphery, the ECB move on Thursday reduced the price Hungary and other higher-risk borrowers pay for their debt — and with it the pressure on Orban to give in to the IMF’s demands.
Orban waited only minutes after ECB President Mario Draghi announced the bank would start buying bonds to say on his Facebook page that conditions set by the IMF for a loan deal were unacceptable.
“The European Central Bank crossed the Rubicon yesterday when it ... announced that it would buy government papers from [eurozone] countries struggling with difficulties,” Orban told public radio on Friday.
“This puts a tool into the hands of governments, and central banks cooperating with governments, which European states did not have in crisis management before,” Orban said.
Orban, who in 2010 abruptly ended an earlier IMF agreement, said his government would work out its own set of conditions. He said his Fidesz party rejected what he said was a list of pension cuts, an end to a tax on banks and other terms that he said was too high a price to pay for a loan.
After months of back and forth, Hungary held its first talks with the IMF and the EU in July, but no date for a new round has been set.
Hungary first needs to respond to lenders’ recommendations before talks can resume and Orban’s tough comments — even though they are part of his negotiation tactics and a message to voters at home — quashed investors’ hopes for a fast agreement.
The IMF has not yet commented or confirmed the list of demands.
“In our view, the turn suggests that negotiations may slow further, albeit we do not expect a break-up in the talks, given that keeping alive market hopes about a future deal is in the interest of the government to ensure local currency funding,” Citigroup economist Eszter Gargyan said.
Many analysts say Orban, who faces an election in 2014, will only agree to a strict IMF/EU program if the forint and local bonds get a severe battering. That is likely largely to be decided as much by international sentiment.
“Until they reassure markets about the IMF talks, the forint will underperform in the region in good times and get a bigger beating than others in bad times,” one currency dealer in Budapest said on Friday, as the forint fell another 0.3 percent.
The ECB’s potentially unlimited bond buying program may also give the government new ideas on how Hungary’s own central bank could help the recession-hit economy.
Parliament — in which Orban’s Fidesz party has a two-thirds majority — has already put four rate setters on the Hungarian National Bank’s monetary council, who are in a majority on the rate-setting panel and who have called for looser policy.
Orban’s economy minister, the architect of the government’s controversial measures, and a top Fidesz party lawmaker have called on the bank to help the economy by buying corporate bonds or providing loans to commercial banks for bond purchases in the secondary market. And in March next year Hungarian National Bank Governor Andras Simor’s mandate will expire and by early July, his two deputies will also be replaced, potentially increasing the government’s sway over the bank.
“When Governor Simor’s term comes to an end, we expect a new politicized governor appointed by Orban to undertake more aggressive and non-standard monetary policy, including expanded liquidity operations for banks and some form of QE [quantitative easing],” Peter Attard Montalto at Nomura said.
“This will be far more important than the interest rate path under a new governor,” he said.
The bank’s press office said the last proposal on secondary market government bond buying came from the government in May.
Under Simor’s leadership, the bank has resisted such calls, and it said in an e-mailed response to Reuters’ questions that such a move could backfire considering Hungary’s weaknesses.
“In Hungary the level of interest rate is not close to zero, and due to market concerns over the sustainability of Hungarian debt, the relatively high sovereign risk premium and lower economic policy credibility, an intervention by the central bank on the government bond market would probably result ... in a weakening of confidence and potentially stronger capital outflows,” the bank said.
The bank last intervened in local fixed income markets in 2003, when it bought bonds to reverse a market slide.
Last month, the bank cut rates for the first time in more than two years by 25 basis points to 6.75 percent in a decision which confounded analysts’ expectations, and which analysts said was probably backed by the four dovish rate setters against the hawkish Governor and his two deputies.
The exact votes will be published next week.
The small cut is the harbinger of more reductions ahead, analysts said, which could take the base rate to 6.5 or even to 6.25 percent by the end of the year — and more rate cuts are seen next year, on the back of an IMF/EU deal.
Could Asia be on the verge of a new wave of nuclear proliferation? A look back at the early history of the North Atlantic Treaty Organization (NATO), which recently celebrated its 75th anniversary, illuminates some reasons for concern in the Indo-Pacific today. US Secretary of Defense Lloyd Austin recently described NATO as “the most powerful and successful alliance in history,” but the organization’s early years were not without challenges. At its inception, the signing of the North Atlantic Treaty marked a sea change in American strategic thinking. The United States had been intent on withdrawing from Europe in the years following
My wife and I spent the week in the interior of Taiwan where Shuyuan spent her childhood. In that town there is a street that functions as an open farmer’s market. Walk along that street, as Shuyuan did yesterday, and it is next to impossible to come home empty-handed. Some mangoes that looked vaguely like others we had seen around here ended up on our table. Shuyuan told how she had bought them from a little old farmer woman from the countryside who said the mangoes were from a very old tree she had on her property. The big surprise
The issue of China’s overcapacity has drawn greater global attention recently, with US Secretary of the Treasury Janet Yellen urging Beijing to address its excess production in key industries during her visit to China last week. Meanwhile in Brussels, European Commission President Ursula von der Leyen last week said that Europe must have a tough talk with China on its perceived overcapacity and unfair trade practices. The remarks by Yellen and Von der Leyen come as China’s economy is undergoing a painful transition. Beijing is trying to steer the world’s second-largest economy out of a COVID-19 slump, the property crisis and
Former president Ma Ying-jeou’s (馬英九) trip to China provides a pertinent reminder of why Taiwanese protested so vociferously against attempts to force through the cross-strait service trade agreement in 2014 and why, since Ma’s presidential election win in 2012, they have not voted in another Chinese Nationalist Party (KMT) candidate. While the nation narrowly avoided tragedy — the treaty would have put Taiwan on the path toward the demobilization of its democracy, which Courtney Donovan Smith wrote about in the Taipei Times in “With the Sunflower movement Taiwan dodged a bullet” — Ma’s political swansong in China, which included fawning dithyrambs