EU green light


The decision by the European Commission to finally give the go-ahead for the talks over an IMF package is "clearly good news" but the process is likely to be drawn out and assumptions of rapid interest rate cuts are "misplaced", London-based emerging markets analysts said on Wednesday.

Timothy Ash, head of Global Emerging Markets Research at Royal Bank of Scotland said in London that "presumably now the call will go in to Washington for a IMF/EC negotiating team to jet out to Budapest over the next couple of weeks".

However, "we would expect negotiations to be lengthy still though, given the track record, and likely various areas of contention with the fund, particularly on the fiscal side".

All that said, the market in the short term will still focus "on this good news story", especially given its prior short bias.

One of the reasons why the EU have decided to stop "playing the tough cop with Hungary" may have been that it does not want another EU country in crisis, especially given the weak broader European backdrop, and with uncertainty over the French election. Also, the Orbán government "has done a stellar job in lobbying in favor of its position", Ash said.

Analysts at Capital Economics said they are "somewhat surprised" that the infringement case was dropped as the government had recently submitted amendments to the disputed central bank law that only covered part of the EC's concerns. This suggests that the EC "has become more flexible towards providing financial help".

But at the same time "Budapest may also have been spooked" by the sell-off in the markets at the beginning of the week, which saw the forint fall to "within a whisker" of HUF 300/euro.

However, there are clearly some grounds for contention; the IMF in particular might demand an end to the "piecemeal austerity measures that we have seen so far". They have already voiced criticism of the flat tax personal income system, which "we estimate has caused Hungary's budget deficit to widen by 1.5% of GDP", but the government appears "wedded to this policy and is unlikely to cede to drastic reforms in this area", Capital Economics said.

Hopes that the central bank will soon start to cut interest rates look misplaced – policymakers "will want to see the money on the table before reducing rates", it added.


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