Bloomberg News

Hungary’s Orban Embraces Central Bank Chief to Save IMF Deal

January 06, 2012

Jan. 6 (Bloomberg) -- Hungary’s Premier Viktor Orban retreated in his confrontation with central bank chief Andras Simor, seeking to revive talks for an international bailout after a market rout this week. Stocks, bonds and the currency gained today.

“The President can count on the government’s support, including our backing for him personally,” Orban said after meeting Simor in Budapest. The government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank to stabilize the economy, Orban said.

The International Monetary Fund and the European Union broke off talks last month on Hungary’s bid for a bailout after Orban refused to withdraw a new central bank regulation the institutions said may undermine monetary-policy independence and Simor’s authority. The forint fell to a record against the euro yesterday as investors speculated an IMF deal may be delayed.

“It’s clear Orban is retreating, the question is whether it’s enough,” Peter Duronelly, who helps oversee $1.5 billion mostly in Hungarian government bonds as chief investment officer at Budapest Fund Management, said by phone today. “If EU leaders expect a total capitulation from Orban, then an agreement won’t be so simple or fast.”

The forint strengthened 0.5 percent against the euro to trade at 317.38 at 11:31 a.m. in Budapest from as low as 324.24 yesterday before Hungary’s chief negotiator, Tamas Fellegi, pledged to compromise with the IMF and the EU on a bailout.

Bonds Gain

The yield on the benchmark 10-year government bond declined to 9.917 percent, falling 48 basis points, the most in six weeks. The yield rose to as high as 11.34 percent yesterday, according to generic prices compiled by Bloomberg. Standard & Poor’s followed Moody’s Investors Service on Dec. 21 in cutting Hungary’s debt to junk, 15 years after the former communist country was awarded an investment-grade rating.

The cost of insuring Hungarian bonds using credit-default swaps fell to 695 basis points today from 735 points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers. The benchmark BUX stock index rose 1 percent to 16,379.77 at 12:47 p.m.

Talks for Hungary’s second bailout in four years broke down following the central bank law that takes away Simor’s right to name deputies, expands the rate-setting Monetary Council and adds a new vice president. A separate law makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Government’s Plea

The central bank law, which came into effect on Jan. 1, is “fully compatible” with EU rules, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi yesterday. The Cabinet will continue to respect the Magyar Nemzeti Bank’s independence, Matolcsy wrote.

Orban shunned the IMF since taking office in 2010 to prevent interference in what he called his “unorthodox” measures. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to tame the budget deficit and forcing lenders to swallow exchange-rate losses on foreign-currency mortgages. The EU has criticized all those policies.

Orban’s government has also reduced the power of independent institutions and asserted its influence since winning elections, bucking objections from the EU, the IMF, the U.S. and the United Nations.

Orban’s Rules

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.

“What’s important to monitor is what conditions international organizations will impose and what the government’s reaction will be,” Levente Papa, a Budapest-based strategist at OTP Bank Nyrt., Hungary’s largest lender, said in an e-mail.

The Cabinet is ready to start negotiations on a standby loan agreement with the IMF and the European Union and wants a deal “quickly,” Fellegi, Hungary’s chief negotiator, told reporters in Budapest yesterday. The government seeks a precautionary loan to tap only if market conditions require it.

It’s in Hungary’s interest to obtain an IMF loan “as soon as possible,” Orban said after meeting Simor today. Hungary sees a “good chance” for swift talks with the IMF, Orban said.

Stability Sought

The government will consult with the central bank on a daily basis and will work together to ensure economic stability, Orban said today. The central bank, in a statement, said it will use “available tools” to ensure economic stability.

“The government seemingly now realizes that an IMF deal would bring benefits in terms of cheaper borrowing and financing costs,” Tim Ash, a London-based economist at Royal Bank of Scotland Group Plc, said in an e-mail today before Orban’s briefing. “It is still weighing this up against the likely political costs, and hence is trying still to ensure that it can sell cutting the deal with the Fund as a victory.”

While the start of talks with the IMF may bolster the forint, the move may “well be misplaced and reversed once the government’s foot dragging then restarts,” Peter Attard Montalto, a London-based economist at Nomura International Plc., said in a report yesterday.

‘First Base’

“We are still on first base,” Montalto said. “Investors are still underestimating the time it will take and the distance Orban will have to move on the policy front.”

Hungary defaulting remains a “real possibility” as Orban may balk at unwinding some of his economic policies in exchange for a bailout, according to Christian Schultz, a London-based economist at Berenberg Bank. It would take “a lot of short- sightedness” from Orban to let Hungary’s economy fail, he said.

“If Hungary does agree to a program with the” EU and the IMF, “it would not need to default,” Schultz said. “However, the conditions attached may not be politically palatable for Orban, making bankruptcy a real possibility.”

The government is “hardly on the brink of default” and still has “some space” until the second half of the year to strike a deal with the IMF, Ash said today.

After a stint as premier in 1998-2002, Orban rode a wave of discontent against the previous Socialist governments that implemented austerity measures starting in 2006 and needed a bailout in 2008.

The previous Socialist administration of Prime Minister Ferenc Gyurcsany angered Hungarians when it admitted to lying about the state of the economy to win the 2006 election, sparking demonstrations that included clashes between protesters and police in the country’s worst street violence in 50 years.

Orban swept to power in 2010, grabbing a two-thirds majority in parliament that allows him to unilaterally change the constitution. He pledged to end austerity, a promise he broke. He has been forced to raise some taxes, including the value-added tax, delay a personal flat tax plan, cut social spending and eliminate early retirement.

--With assistance from Andras Gergely in Budapest. Editors: James Hertling, Leon Mangasarian

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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