Malta’s trade and bilateral relations with Hungary (nostalgically labelled “Goulash lovers”) were at their peak during the socialist years in the late 1970s, when a number of companies were set up – mostly in the engineering sector – with the help of Hungarian technicians.
Sadly, none of these enterprises have survived, but relations were renewed when Hungary left the Soviet regime and subsequently joined the EU in 2004. From the economic perspective, one sadly recounts how the Hungarian economy and its currency, the forint (HUF), is facing turbulent times on the international markets reflecting a recession. As will be seen later in this article, the forint has been making the headlines as a currency that is facing extreme pressure to devalue and Hungary, as a consequence, is being made to suffer a higher cost of servicing its debt repayments. Yes, Hungary’s prime minister – 35-year-old Viktor Orban – is out in the streets begging for a second bailout. His government, which won a landslide victory in the 2010 election, is facing strong criticism from opposition politicians and activists, who have sought EU help against Mr Orban’s centre-right party’s tight grip on power.
This situation is now coming to a head, with the promulgation of a central bank law which, according to critics, carries potentially serious economic consequences. The legislation proposed by Mr Orban opens the way for an increase in the number of members on the bank’s interest rate-setting committee appointed by Parliament and a possible merger of the central bank and a financial regulatory agency, which would potentially result in the effective demotion of the bank’s governor. Both, the National Bank of Hungary and the European Central Bank have said the law poses a significant threat to the central bank’s independence. The impasse has become more complex with both the EU and the IMF making the bank’s independence a pre-condition to any new financial backing.
Hungary has an outstanding debt equal to more than 80 per cent of its annual economic output (compared to 68 per cent in Malta). This year, it will need to repay or roll over more than €4 billion in external debt and, as was to be expected, the forint has fallen to a record low against the euro. But who will come forward to bale the Goulash lovers out of their misery? Based on its own limited resources, Malta has been ready to participate to help build up a fund in the latest IMF-sponsored eurozone rescue mechanism following the 9 December summit. This works out at a comparatively small sum, but for our fragile economy the contribution looks equally generous.
Malta did pledge between €150 and €200 million in new bilateral loans as part of the €200 billion deal. Naturally, weaker countries were not expected to contribute – being themselves the recipients of aid. So Greece, Portugal, Ireland, Hungary, Romania, Latvia, Bulgaria and Lithuania will not be participating, while the UK (recently labelled the prodigal son) will not be contributing any funds to this special purpose vehicle but will be making further contributions to the general funding facilities of the IMF.
Hungary, which became the first EU country to receive an IMF-led bailout in 2008, initially refused more aid in 2010. Its prime minister reversed this stance last year, when the state started struggling to raise funds at debt auctions and the forint plummeted. It is not raining, it is pouring for Hungary, as it was down-rated to junk grade recently by Standard & Poor’s. Such downgrades are reflecting badly on the cost of borrowing on currency auctions with the result that Hungary’s Government Debt Management Agency (ÁKK) has sold HUF 35 billion worth of 12-month discount Treasury bills at an average yield of 9.96 per cent, which works out as a 2.5-year high. The ÁKK presumably could not afford to not protect the reputation of the country and its funding needs. Investors sent yields on Hungarian bonds in the secondary market to levels not seen since after the Lehman Brothers collapse in 2008 that led to an IMF and EU bailout of Hungary at the time. This week, yields on Hungarian 10-year bonds were between 10.1 per cent and 10.3 per cent, well above the 8.9 per cent before the dispute over the imposition of central bank law late last year.
As was to be expected, the cost of insuring Hungary’s debt through credit-default exchanges reached an all-time high and the forint touched a record low versus the euro. This was particularly critical considering the further complication that the aid negotiations with the IMF were bogged down because of laws that threaten to undermine the independence of the central bank. The EU stepped up pressure on Hungary, saying that it would scrutinise a new central bank law before deciding whether to resume financial support talks with the critically indebted government. This was met with a massive rally by the citizens of Budapest protesting against Viktor Orban and a new national constitution that critics complain concentrates too much power in the government’s hands and undermines democratic checks and balances.
In a gesture to avoid a stalemate, the EU executive called on Mr Orban to maintain the Central Bank status as an independent entity. When he was elected, Mr Orban, who is leader of the Fidesz party, promised to stimulate faster growth, curb inflation, and reduce taxes. In 2009, the government inherited an economy with positive economic indicators, including a growing export surplus. The government abolished tuition fees and aimed to create good market conditions for small businesses and encourage local production with domestic resources. But the economy has since stagnated and, faced with such big hurdles, Hungary’s parliament conceded that the country is ready to negotiate a second standby loan with the IMF without setting any preconditions. Sanity prevailed after heavy diplomatic pressure and the cabinet has now agreed to reform a recent law which observers say compromises the independence of the country’s central bank. Amid such uncertainty, the cost of protecting Hungarian debt against non-payment via credit default exchanges continued to soar, resulting in an uncertain future for the country.
Meanwhile, tensions in other peripheral markets were renewed in the New Year with Spanish and Italian government bond yields on the rise. France, which faces worries over the standing of its triple-A rating, is set to issue government bonds this week, while Spain and Italy will tap the market for the first time in 2012 next week. Fears over Hungarian solvency could also increase borrowing costs for other countries in emerging Europe, now waiting nervously for the outcome of the market sentiment. For the record, the forint fell to its lowest level this week, reaching HUF321.67 to the euro.
Along with a weak currency was the bad news that yields on Hungarian bonds exceeded 10 per cent and, as stated earlier, such high levels have not been experienced since just before the 2008 international bailout. This uncertainty did not bring any Christmas cheer to Hungarian households. In fact, a devalued forint exerts pressure on the government, effectively raising the costs of its foreign-currency debt and increasing the burden on private individuals that hold foreign-currency loans. Analysts said an agreement with the IMF and EU for a second loan would be the quickest way for Hungary to regain the trust of markets, which have been sceptical of the long-term impact of some of the government’s stopgap funding measures.
To conclude, both the EU and IMF want to safeguard the Hungarian central bank’s autonomy but equally they have no interest in destabilising the country financially while they are concurrently working to resolve debt problems elsewhere (Italy and Greece). Surely, nobody can blame Mr Orban for claiming that outsiders should not meddle in his country’s internal affairs. He believes passionately that his country is not in danger of near-term default as, in his opinion, it has ample funds for the first repayment of its 2008 rescue loan, which is due in February. He pontificates with his party faithful that the central bank’s foreign exchange reserves are larger than in 2008, while Hungary has a surplus in its current account, a measure of international trade and payment flows, as well as in its capital account. It has also succeeded in bringing its budget gap below the three per cent level as a EU-mandated target. But, really and truly, you cannot fight and expect to bully the markets and the rating agencies when your currency is in the doldrums. Sadly for the goulash eaters, it is a dilemma: they are seeing Mr Orban’s popularity wane as Hungary’s economy falls victim to further uncertainty and consequently cannot escape drinking the poisoned chalice of another IMF bailout.
The writer is a partner in PKF, an audit and business advisory firm
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