Tim Gosling in Prague
June 19, 2012
Not for the first time (and likely not the last), Hungary claimed on June 18 that it has agreed a compromise with the IMF and ECB on its central bank legislation, and that the "last hurdle" to opening bailout talks is about to be eliminated. Whilst the amendments do not fully meet the demands of the international organizations, Budapest is gambling that they will accept the terms for now in a bid to avoid another European country sliding into crisis.
According to Reuters, Mihaly Varga, the minister in charge of International Monetary Fund talks, told Kossuth radio: "Over the weekend ... we have managed to close our discussions relating to the central bank law and we managed to prepare the amendment which we can submit to parliament this week. With this, the last remaining serious hurdle in the way of (credit) talks will be eliminated."
The official said discussions were conducted through the weekend, adding that the embattled governor of Magyar Nezmeti Bank (MNB) Andras Simor is willing to support offering the compromise in a letter to the IMF, ECB and the European Commission. "We have managed to find a solution which is reassuring to everybody," Varga claimed.
However, no comment was immediately available from the IMF or central bank, whose objections to the last round of amendments led to a last minute cancellation of a parliamentary vote on the act. The number of skeptics that suspect the Hungarian government is "doing a turkey" - stringing the markets along with the prospect of an IMF programme with little intention of actually sealing a deal - has risen markedly in recent months given the long delay on starting talks since Budapest first asked for a bailout in November.
That said, the markets remain keen to believe the Hungarian government really is ready to accept the strict conditions that would come attached to an IMF deal. Varga's claims - alongside the eased worries following the Greek election - saw the forint spike to a one-month high of 292.33 per euro, and sovereign bonds rally to cut yields to 8.36%, reports Bloomberg.
However, the Fidesz government has claimed several times so far that talks could start imminently, and it now appears ready to play chicken with the IMF and EU as the growing crisis in Europe increases the pressure on risky assets - such as Hungarian debt and the forint. At the same time, the country has significant cash buffers, and Prime Minister Viktor Orban claimed yet again over the weekend that that Hungary can fund itself without help.
Varga said the government will withdraw the earlier amendments to the central bank act and insert new points this week which will take into consideration the issues raised by the central bank, the European Central Bank and the IMF. He said that parallel to this, Orban will send a letter to European Commission President Jose Manuel Barroso in which he will undertake not to nominate a new deputy governor or further Monetary Policy Council (MPC) members. However, that pledge will only run to the end of the MNB's current leadership term in March next year.
Whilst the delay to the expansion of the MPC does not fully deal with what has become the IMF and ECB's main concern over the MNB's independence, Hungary appears ready to gamble that Brussels will accept putting off a confrontation on the issue as it fights fires across Europe. Whilst Hungary's trade surplus has helped it build reserves, analysts expect it to need to turn to international markets early next year. With yields approaching 9%, Budapest will need to see risk aversion fall before it seeks that funding, or finally fall into line with the IMF and EU demands.