Officials from the European Commission and the International Monetary Fund will travel to Budapest on July 17 to begin open talks on a loan programme, a spokesman for the commission said on July 6. The `announcement followed close on the heels of a vote in the Hungarian parliament passing the amended central bank act. However, as the market's somewhat surprising reaction illustrated, a swift deal appears unlikely.
The vote resolved seven-months of bickering and criticisms cast between Budapest and both the EU and the IMF since the Hungarian government performed a u-turn to apply for a bailout. The ruling Fidesz party introduced changes to the central bank act in January after months of fighting with the Magyar Nezmeti Bank, which sought to expand the monetary council and number of deputy governors.
Critics claimed it was a move by Prime Minister Viktor Orban to reduce the independence of the MNB, which he has been unable to convince to lower the EU's highest interest rates of 7%. The EU and IMF made the issue the central plank of its demands before opening talks on a loan programme. Budapest has taken months to meet those demands, and even then, the bill that was passed only delays its plans for the central bank until the end of current Governor Andras Simor's tenure in 2013. Still, fighting fires on so many fronts, the IMF and European Central Bank waved through the compromise in late June.
However, the government has already sparked another major row with Simor, with a proposal to make the MNB subject to its new financial transactions tax announced last week. The central bank governor has responded by calling the plan "illogical, dangerous and illegal," claiming that it impacts MNB independence by limiting its scope to set monetary policy.
The ECB and the IMF have not yet commented on the tax plan, and most analysts do not expect the issue to prevent the opening of the negotiations, but do expect it to be a talking point that is unlikely to ease what are already likely to be extremely difficult meetings.
Orban and other officials continue to insist that Hungary does not need a bailout, but merely a "precautionary" safety net. That sort of language - suggesting Budapest is still determined to press for a programme with few conditions - has provided much of the ammunition for skeptics who suspect Hungary of "doing a Turkey": dangling the prospect of an IMF programme to keep the market off its back with little enthusiasm for actually sealing a deal.
The IMF is thought to be intent on insisting on tight supervision to accompany any loan to restrict Budapest's "unorthodox" economic policy - which is the core of the market enthusiasm every time the talks appear to be moving closer. However, investors showed a wary response to the passing of the bill, presumably as their attention turned to the prospect of another long-winded series of argument.
"Hungary is in need of an IMF deal to restore credibility to policymaking and thus ease borrowing costs," writes William Jackson at Capital Economics. "The market response to the news has, however, been muted, suggesting that today's vote was largely priced in. In the days following last month's announcement of the amendments, the forint strengthened from 295/_€ to 285/_€ while bond yields fell by around 50bps."