Although Hungary, seeking to secure a precautionary loan deal with the International Monetary Fund, was to continue discussions with officials of the IMF and the European Union on Monday, the mission from the Washington-based lender decided to return home. The EU also postponed the conclusion of the review of the country’s EUR 20 billion credit facility granted in the autumn of 2008. The reason is that “a range of issues remain open" and the cabinet that will need to provide clarification for these. Brace yourself for Monday, folks!
That’s it, we’re leaving!
An IMF mission, led by Christoph Rosenberg, held discussions with the Hungarian authorities during July 6-17, as part of the sixth and seventh reviews of the country’s Stand-By Arrangement (SBA) approved on 6 November, 2008.
While there was “much common ground" between the negotiating parties, the IMF has announced that its mission decided to return to Washington D.C., as “a range of issues remain open". It said it would seek to bridge these differences.
European Commission officials, in close cooperation with IMF staff, conducted their fifth review mission under the EU balance of payments assistance to Hungary in the aforementioned period. They, however, said there were “a number of open questions on which the government would need more time to provide clarification." The EU executive decided to postpone the conclusion of the review and that “it would be appropriate to return for further discussions at a later stage."
The parties were to hold a joint press conference on Monday, provided they come to terms about a few issues. They have not, so the IMF stood up and left and the EU did not conclude its review.
Rate meeting ahead
The early departure of the missions mean Hungary cannot draw the next tranche of the credit facility, although the country had no intention to do so therefore it will have no impact on the budget. But the break in the talks is likely to lead to forint weakening and a rise in government securities yields on Monday, i.e. the financing of the state will become more expensive.
The morning market reactions will be especially crucial as the central bank’s (NBH) Monetary Council will hold a rate setting meeting that day. According to the consensus forecast of analysts in a Portfolio.hu poll, the MPC will keep the base rate on hold at 5.25%. But a sharp HUF depreciation and a rise in Hungarian CDS (Credit Default Swap) spreads might convince the MPC to hike rates. This, of course, will not help boost lending and economic growth.
The officials welcomed the new government's commitment to the budget deficit target of 3.8% of GDP for 2010 and recognised that “several significant measures" have been taken to correct budgetary slippages this year.
"Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU. I welcome the authorities' commitment to the 2010 deficit target," said Olli Rehn, Commissioner for Economic and Monetary Affairs.
"However, the correction of the excessive deficit by next year will require tough decisions, notably on spending. Care will also be needed to ensure a stable environment for both domestic and international investors," he added.
The IMF noted that the Hungarian economy has begun to recover from the deep crisis of 2008-09, “driven mostly by strong exports." It added, though that domestic demand remains weak, “owing to difficult lending conditions and a soft labor market."
Although Hungary’s fiscal deficit targets - 3.8% of GDP for 2010 and below 3% in 2011 - remain an “appropriate anchor for the necessary consolidation [...]" the cabinet will need to take “additional measures" not only on the revenue side - where the high financial sector levy is likely to curb lending and growth - but also on the spending side, the IMF emphasised.
It also stressed that “it is important that the vulnerable continue to be protected from the impact of the weak economy, although any further support should be provided in a targeted and transparent manner."
Clear conflict
It was known for a fact that there are differences between the local authorities and the IMF-EU team. The IMF did not like, for instance, that the government was unable to sit to the negotiating table in June, saying it was too busy taking over from the previous administration. And when the discussions finally started in July, it found itself face to face with an inflexible cabinet that presented its planned measures as a ‘take it or leave it’ package. These included a massive surcharge on the financial sector that the government hopes to raise HUF 200 bn this year or a national asset management company that would help financially strung foreign currency mortgage debtors not to lose their homes due to non-payment.
The EU and the IMF proved to be adamant on the previously accepted fiscal goals (the budget deficit targets for both 2010 and 2011), while the government had signalled earlier that it would try to negotiate a higher goal for next year.
Although Hungary has not drawn on the credit facility for some time now, the news is definitely negative for the markets, as it increases uncertainties. There were only a few possible scenarios, but it seemed most likely that the IMF and the EU would go easy on Hungary on some issues, in exchange for which Hungary will show a very strong commitment to the deficit goals. Well, it turned out quite differently.
The seriously indebted country is now left without a lifebelt on rough seas, while it could have been considered as a sign of solid solvency even if the going got tough on global capital markets.
In Portfolio.hu’s view, the most likely scenario for Hungary now is this: The same thing will happen that happened in Romania and Ukraine. The IMF mission (the EU executive in the case of Romania) stands up from the talks and leaves the country to digest what it was told. After a few months of “think time", when it becomes evident the markets are not so fine, it returns to see whether the country is ready to renegotiate and reach the necessary agreements. Party as a result of such process, Ukraine has recently decided to carry out a 50% gas price hike just to get the nearly USD 15 bn credit facility it was offered. To receive the financial help Romania has announced a package of Draconian measures. After the Constitutional Court rejected some of the planned measures, it seemed Romania needs to say bye-bye to the loan. The RON started to depreciate immediately, and the cabinet - wonder of wonders - quickly found a solution in order to get that money.
On Friday we witnessed how fast global sentiment can turn from buoyant to gloomy and this piece of news will certainly deal another blow to the mood on Hungarian markets. We need to stress how strongly the IMF sticks to its stance; it practically wants Hungary to implement new austerity measures (and the EU concurs). The following section may be the most important of the whole statement.
While the IMF praised Hungarian authorities for making “good progress in helping their economy recover through prudent macroeconomic policies and strengthened financial sector policies, including improved banking supervision," it said:
“[...] more remains to be done to cement these gains and put Hungary on a strong and sustainable growth path. In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced—3.8% of GDP in 2010 and below 3% of GDP in 2011—remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives. Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop. Difficult decisions will be needed not only on the revenue side--where the high financial sector levy, which is likely to adversely affect lending and growth, is planned to be temporary--but also on the spending side."
“In addition, the large loss-making state-owned enterprises need to be restructured to reduce their burden on the budget. In this context of fiscal adjustment, it is important that the vulnerable continue to be protected from the impact of the weak economy, although any further support should be provided in a targeted and transparent manner."
“While there is much common ground, a range of issues remain open. The mission will therefore return to Washington, D.C. The IMF will continue to actively engage with the authorities with a view to bridging remaining differences," the IMF concluded.
Lots of reservations by the lenders
Although the EU mission welcomed the government's commitment to the agreed budget deficit target of 3.8% of GDP for 2010, it stressed that “continued fiscal adjustment in line with agreed fiscal targets is essential to ensure a reduction in the government debt ratio, improve financing conditions and support sustainable growth and to support credibility in Hungary’s public finances."
It recognised that following the budgetary slippage in the first half of this year, a number of steps were taken to correct the situation, including sizeable revenue-enhancing and expenditure-saving measures.
“However, the corrective measures considered so far fall somewhat short of the required adjustment and are largely of a temporary nature."
“Hence, the government has to make increased efforts to bring the deficit below 3% of GDP, on a sustainable basis, in 2011," the Commission added.
The EC probably disliked the government concept on the bank tax, as well (Hungary hopes to raise HUF 200 bn from it in 2010 and 2011, respectively and the extra tax would remain in effect also in 2012.), as it said: “While noting that the planned financial sector levy would help in meeting short-term budgetary commitments, the Commission services considered that the levy in its current form could have a significantly negative impact on the country’s investment climate and economic growth. The mission urged the authorities to review some features of the levy in this regard."
According to index.hu, the missions wanted Hungary to aim at smaller revenues from the bank tax than HUF 200 bn in 2011, but the government would not budge.
Brussels also made it clear that it wants more clarity on structural reforms.
The EU executive recognised that financial stability has been underpinned by the reinforcement of prudential supervision in the financial sector and also that the government is committed to structural reforms elsewhere, including in the transport and health sectors, the mission noted that “the government was not in a position to provide more clarity at this stage."
Regarding the structural reform conditionality pertaining to the EU's financial assistance, apart from the satisfactory progress in the area of financial sector, there was also some progress in the area of structural governance although the mission noted a number of concerns, such as the time lag between phasing out the system of treasurers and introducing the new system of supervisors.
With respect to structural reforms in the area of the public transport sector that were supposed to underpin the planned budgetary savings, the mission noted that “most of the planned measures had been postponed except for the price increase earlier this year. This underlines the importance of the envisaged restructuring of this sector."
The EC implicitly expressed its reservations about the centre-right Fidesz government’s plan to cap the salaries of central bank management at HUF 2 million a month.
“The mission further urged the government to respect the full independence of the central bank, including its operations," it said.
The EC also considers several draft laws proposed by the government to be “distortive and potentially not in compliance with EU law." Here they most likely refer to a law amendment proposal submitted by a Fidesz MP that would exempt from the new bank tax insurance companies chartered after 1 July, 2007. Interestingly enough, the break would only benefit a few companies, the most prominent of them being an interest of former and current Fidesz members. The company in question, life insurer CIG Pannónia Életbiztosító Zrt., is chaired by Zsigmond Járai, who served as Finance Minister - and then Governor of the Hungarian National Bank - under the previous Fidesz government (1998-2002). Among its other founders is current (and former) Foreign Minister János Martonyi. There is also another proposed amendment that may be seen as having been narrowly tailored to suit CIG, namely a cap on the taxes levied on certain insurance products that the company's life insurance arm generates much of its income from. The draft law has already been dubbed “Lex Járai".
Another insurance company would also benefit from the law, Wabard Biztosító, an interest of György Wáber who is also close to Fidesz.
According to an unnamed source speaking to local news portal index.hu, the tax exemption would save CIG Pannónia up to HUF 400 million and Wabard HUF 300 m this year.
The EC considered that “further discussions with the authorities were needed and it would be most productive to postpone the conclusion of the review and to return at a later stage."
Charting is displayed using TradingView's technology, a platform, where you can build advanced charts,
spot upcoming trends in the stock screener, and find inspiration in multiple trading ideas
