Tue, Sep 11, 2012 page9

• Hungarian PM toughens stance against the IMF

  The ECB’s bond-buying plan has reduced the pressure on Viktor Orban to give in to the IMF demands on debt negotiations

  • By Krisztina Than / Reuters, BUDAPEST
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  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.
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