Hungary’s Piquant Goulash Tasting

Hungarian debt and CDS yields again crept up as the EU followed through on its convergence aid suspension threat unless constitutional and policy changes are enacted by June. IMF backup loan talks stayed in limbo in advance of the organization’s spring meeting, and the OECD weighed in with a critical report highlighting recession and financial stress. It cited high sovereign rollover needs the next two years as “weak recovery” appears in the second half. Private sector debt reduction has hurt demand and investment is “subdued” due to uncertainty and the imposition of the “sizable bank tax and credit rationing.” Gross fixed outlays are down 25 percent since 2008 and medium term prospects are “bleak” without productivity gains to outstrip the aging population. The December 2011 burden-sharing plan to ease household foreign currency exposure insufficiently targets distressed borrowers, the agency believes. The Szell Kalman fiscal regime proposed in the Orban Administration’s early days did not define detailed cuts in public spending at near half of GDP, with local government employment overcapacity a key area. State transport companies, as evidenced by the Malev airline’s recent bankruptcy, continue to sustain heavy budget losses. Energy and property tax increases should replace special crisis levies and social security savings are also available. The new economic stability act sets a responsibility rule for mid-decade, but the council to enforce it is too politically-charged and multiple exceptions may counter the original intent. Monetary policy as well is no longer a technical exercise with central bank officials subject to spontaneous dismissal and replacement contrary to standard Brussels norms. Bank and personal balance-sheet cleanup must occur simultaneously to revive the intermediation function, but may currently conflict with mortgage forgiveness outcomes which have favored early repayment and caused foreign-run groups to “freeze or downsize” networks.

Objective criteria for the program such as negative equity and loan-to-income qualifiers are lacking, and tax write-offs could assume a greater role in loan restructuring. Recapitalization may be needed and a new financial services transactions charge under consideration may hamper the effort. Half of marketable debt is in non-resident hands with shorter maturities, and forint depreciation has essentially absorbed the windfall from private pension transfer. Many sectors including law enforcement and mining receive privileged retirement benefits not subject to recent general curbs on early access. Loan contracts are prone to “unilateral modification” and the credit information systems are “undeveloped,” according to the update. Regulators should be equipped with more autonomy and power under coordination from the overall stability board. In a separate assessment of state-run health care, the examination cited the absence of private capital returns and delivery and quality factors, and called for better organization and fund use to stir the pot.