Hungary’s Legal Maneuvering Delays

Hungarian stocks were flat and foreign investors held their one-third local debt position despite the floundering forint, as the EU-ECB and IMF continued to bicker over central bank law revisions needed to launch formal program negotiations which have already lost momentum from other disputes and Budapest delegation turnover. Independence is at stake with the government’s power over governor and monetary policy committee appointments, as incumbents kept the 7 percent benchmark rate intact as they tried to balance recession and confidence imperatives. Q1 output contraction was over 0.5 percent, with particular weakness in financial services as NPLs jumped to 15 percent of the total and a new transaction tax was previewed. Parent banks have withdrawn over EUR 10 billion the past two years although the industry loan-deposit ratio remains at 120 percent.  The grim reading followed the European Commission’s retraction of its cohesion fund cutoff threat as fiscal deficit plans were reworked to come in under 3 percent of GDP, but lingering doubts retain the broader excess deficit sanction. With basic challenges to economic approaches and assumptions unlikely to be resolved quickly with the strong personalities and positions on both sides and approaching summer break, a standby deal may not be feasible until early fall and choppy external debt markets could preclude excess for the duration. The currency was off almost 10 percent against the falling euro in May, and domestic bond auctions experience regular buyers’ strikes as yields creep toward double-digits and the overseas base dwindles to a handful of opportunistic and large global players seeking incremental carry. Romania, which has a EUR 5 billion precautionary line, may find that sum insufficient as it is equal to Greek bank subsidiary deposits subject to a run on Eurozone exit talk and post-election Troika disbursement refusal. GDP growth is under 1 percent and inflation is double that figure, as the central bank is on hold to maintain bilateral and multilateral support after the caretaker government won wage and pension concessions to quell popular disquiet within the agreed fiscal envelope. A new World Bank $1 billion package will be used as a financial system safeguard and another external bond issue may be forthcoming with currency calm.

The Budapest exchange is down only 5 percent, in comparison with simultaneous EU accession choice Bulgaria where the loss is six times greater. There Greek-run operations account for one-third the banking sector and bad and restructured credit absorbs one-quarter of portfolios. However the current account balance is now positive and the currency board based on fiscal reserves imposes discipline which despite political pleas have pre-empted recourse to outside assistance. The prime minister, as a former World Bank official, was instrumental in establishing the “Doing Business” rankings and he has spearheaded anti-corruption campaigns yet to restrain other forms of undesirable behavior according to Brussels enforcers.