Hungary’s IMF Talks May Fail as Orban Rejects EU Demands
December 27, 2011, 12:23 AM ESTBy Zoltan Simon
(Updates with premier’s comments in fifth and 23rd paragraphs, CDS in eighth, investor’s comment in ninth, 10th.)
Dec. 23 (Bloomberg) -- Hungary’s failure to obtain an international bailout loan wouldn’t be “so significant” even after the country received its second debt downgrade to junk in a month, Prime Minister Viktor Orban said.
The European Union and the International Monetary Fund broke off talks with Hungary on an aid package a week ago, saying two bills lawmakers plan to approve this year may curb the central bank’s independence. European Commission President Jose Manuel Barroso in a letter asked Orban to withdraw the draft laws, which the Hungarian leader rejected in his reply.
“There is nothing in those laws to which he has the right or the means to object,” Orban said in a HirTV interview yesterday, noting for the first time that bailout-loan talks may fail. “This whole thing isn’t so significant. If we reach an agreement with the IMF, we have a safety net. If we don’t, then we don’t have one. The country will still stand on its feet and will continue to function.”
The government asked for IMF aid last month to ensure financing next year as yields soared, debt auctions fell short of targets, the forint weakened to a record against the euro and Standard and Poor’s signaled a potential downgrade. An IMF-led aid package would bolster Hungary’s policy credibility, S&P said on Dec. 21, when it followed Moody’s Investors Service in downgrading Hungary’s sovereign credit to junk.
The European Commission hasn’t decided whether to resume financial-aid talks with Hungary, the EU executive’s representative in Budapest, Tamas Szucs, said in an e-mail yesterday. Hungary wants a “precautionary credit line” which it would only tap if “international money markets became paralyzed,” Orban said.
‘Road to Default’
The forint traded at 306.91 per euro at 9:49 a.m. in Budapest. The currency has fallen 13 percent since June 30, the worst performance among more than 170 currencies tracked by Bloomberg.
Hungary sold 30 billion forint ($128 million) in 12-month bills yesterday, 10 billion forint less than planned, as the average yield surged to 7.91 percent, the highest in almost 2 1/2 years.
Hungary’s five-year credit-default swaps, which measure the cost of insuring state debt against non-payment, rose 38 basis points to 609 yesterday, the highest in more than three weeks and the ninth-highest in the world, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers.
‘Catastrophic Scenario’
“We may be headed for a catastrophic scenario, which is the inability to finance the economy or to do it at yields well into the double-digits which is unsustainable,” Daniel Bebesy, who helps oversee $1.5 billion mostly in Hungarian government bonds at Budapest Fund Management, said by phone today. “This is the road to default.”
The probability of such a scenario is “impossible to calculate because of the unpredictability of economic policy,” Bebesy said. “Still, the events of the recent weeks and months show that policy makers are not aware of their maneuvering room and are running into a wall.”
Hungary’s sovereign-credit ratings were cut one step to BB+ from BBB- by S&P, which assigned a negative outlook. The country lost its investment grade after 15 years. Moody’s lowered its assessment to Ba1, the highest junk grade, on Nov. 24, while Fitch Ratings has assigned its lowest investment grade, BBB-, with a negative outlook.
‘Unorthodox’ Measures
Hungary will have the highest debt level and slowest economic growth among the EU’s eastern members next year, the European Commission forecast on Nov. 10.
Orban shunned IMF aid after taking office last year to protect what he called “unorthodox” measures from oversight. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget, which had a deficit of 182 percent of the Cabinet’s full-year target at the end of November.
Hungary also forced banks to swallow losses on foreign- currency mortgages. The measures may hinder economic growth and are “likely to depress investment and job creation in the short term,” S&P said.
Orban, backed by a two-thirds parliamentary majority that allows him to unilaterally change the constitution, pressed ahead with consolidating his power.
The latest measures are plans to take away central bank President Andras Simor’s right to name deputies, expand the rate-setting Monetary Council and weaken the bank’s leadership and add a new vice president. A separate bill would make it possible to demote the central bank president if the institution is combined with the financial regulator.
‘Almost Total Takeover’
The bills would amount to an “almost total takeover” of the central bank, Simor said on Dec. 15. Previously, he rejected what he called “bullying” by a government official to quit before his term ends in 2013.
Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.
‘Harming’ Prospects
“Changes to the constitution and the functioning of some independent institutions, including the central bank and the constitutional court, have undermined Hungary’s institutional effectiveness,” S&P said. “The predictability of Hungary’s policy framework continues to weaken, harming Hungary’s medium- term growth prospects.”
The central bank raised its benchmark interest rate to 7 percent on Dec. 20 from 6.5 percent, which was already the EU’s highest. Policy makers said they may increase borrowing costs further if risk perception and the inflation outlook deteriorate “substantially.” The Economy Ministry criticized the rate increase, saying it harms growth.
Investors are shunning riskier assets and demanding higher yields as European leaders grapple with the euro area’s sovereign-debt crisis, which started in Greece more than two years ago and is threatening to infect weaker economies.
S&P is studying the outcome of an EU summit this month to streamline fiscal policies before deciding whether to go ahead with its threat to cut the credit rating of 15 euro-region nations, the company said on Dec. 9.
“All of Europe is under attack,” Orban said. “Everyone is continuously being downgraded and we’re slowly getting used it and it’s therefore losing its significance.”
Orban plans to cut debt from 81 percent of economic output last year and is seeking to keep the budget deficit within 2.5 percent of gross domestic product next year.
Hungary’s economic growth may slow to 0.5 percent in 2012 from 1.4 percent this year, the European Commission said Nov. 10. Debt may fall to 75.9 percent of GDP this year before rising to 76.7 percent in 2012, the EU’s executive branch said.
--With assistance from Andras Gergely in Budapest and Rebecca Christie in Brussels. Editors: Balazs Penz, Alan Crosby, Andrew Langley
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
