Hungary urged to change bank plans as forint hits new low

[Bernkastel]

Here's another piece of bad economic news. Source here.

The Hungarian government has been urged to reverse controversial plans to curb the independence of its central bank in order to secure a multibillion-euro loan from the International Monetary Fund and the European Union.

The forint hit a record low on Wednesday and Hungarian bond yields soared, prompting economists to warn that Budapest must act swiftly to restore market confidence and avoid inflicting financial pain on the nation of 10 million. In response to the rapidly worsening situation, Hungary's government said it might moderate some policies to appease international lenders, who are unhappy over a new law curbing the independence of the central bank.

The IMF is also displeased with new legislation that requires a two-thirds parliamentary majority in order to change the 16% flat income tax rate brought in by the current government.

"We are ready for talks without preconditions, all issues can be on the table," minister Tamás Fellegi was quoted as saying in the weekly Figyelo. As the government's chief negotiator, Fellegi is due to visit Washington next week in an attempt to reach an agreement on a credit line with the IMF and the EU. IMF officials have reportedly refused to negotiate with Hungary's erratic economy minister, György Matolcsy, who justifies his unorthodox economic policies by saying he is "working from an economics textbook that has not even been written yet".

The prime minister, Viktor Orbán, who is nicknamed the Viktator by his critics for his authoritarian leadership style, has called his economics minister "my right hand. Nobody could name a high enough sum for which I would be willing to give up my right hand."

Jánoz Lázár, parliamentary leader of the ruling Fidesz party, has told local media that Hungary would repair its relations with the EU and IMF – but was not ready to roll over and submit to all demands. "I am sure we will come to an agreement, but we will exchange a few punches in the meantime," he said. Péter Krekó, research director of the Political Capital thinktank, said that Orbán was committing "political suicide" by being so hostile to the EU and IMF, despite knowing full well that his country really needs the €15-20bn loan as a safety net.

"I don't think the government – or Hungary – can survive without the IMF/EU loan," he said. "The future of this country is bound up with that loan. Not accepting it, whatever conditions may be imposed, would be political suicide. In the short term, maybe six months or so, we'd be OK. But after that, Viktor Orbán cannot survive."

Others predicted that failure to do a deal would see the forint appreciate, a run on the banks, higher interest rates and higher inflation. State secretary Gyula Pleschinger, a member of Hungary's negotiating team with the IMF, was quoted by the Wall Street Journal on Wednesday as saying that while Hungary would "discuss and consider all options", a failure to reach an agreement on aid would be "no tragedy" because the country had a plan B.

But János Samu, an analyst at Concorde, said it would be a "disaster". He added: "The forint will continue to depreciate, people will take their money out of the banks, the banks will not have enough money to give out and will have to borrow it at high interest rates." Since gaining two-thirds of all parliamentary seats in 2010, Fidesz has used its so-called "super majority" to tighten its grip on the media and the top constitutional court, taken over private pension funds and dismantled an independent budget oversight body.

Polls show that during its 18 months in power, support for Fidesz has halved, and on Monday at least 30,000 people protested in Budapest. A bond swap intended to extend the maturity of the country's debts was also cancelled on Wednesday because of the recent spike in its borrowing costs.