Haggling or juggling?


Since 2011 December Hungarian government has permanently been reinforced its willingness to negotiate about loan with the International Monetary Fund. IMF’s preconditions for such a deal are clear-cut: they want Hungarian monetary regulations be in compliance with the Hungarian National Bank’s autonomy. The latest amendment to  the Central Bank Act, to be accepted by the parliament on June 4, goes against IMF’S expectations in many points. Contradictory as it is, Hungarian government might have a second though of using MNB’s foreign exchange reserves for refinancing sovereign debt, experts told the BBJ.

Early this week in a  TV interview Mr. Mihály Varga, the freshly appointed cabinet minister responsible for negotiating with the IMF reinforced the government’s commitment to agree with the IMF about a 15bn euro „stand-by” loan as soon as it is viable – possibly before the end of summer.

They have a good reason to hurry. The rates of an IMF loan would be much favorable than the market conditions under which the State Debt Management Office (ÁKK) is currently issuing state bonds. Since Hungarian sovereign debt rating was decreased to junk status last November, interest rates on newly issued government bonds have not sunk bellow 7 percent. According to debt experts, the interest rate of an IMF loan would hardly surpass 4 percent, the average of the Euro zone government loans. „ for the central budget Market refinancing has amounted to HUF 80-100 billion just in the last trimester,” András Simor, president of the Hungarian National Bank told on a press conference early this month. This is the difference between the costs of a possible IMF loan. and refinancing state debt from the market.

Future burdens of refinancing expiring state debt sum up to an even more dramatic, as an amount equal to 5,5 billion HUF mature this year. “Almost the hulf of the maturing bondis are denominated in foreign exchanhe which cannot be swapped into forints. The domestic bond market would not simply shoulder it,” Tamás Gerőcs, senior analyst at Equilor Investment House told the BBJ.

Reasons for commencing negotians with IMF are many, formal talks about the financial assistance programme have been permanently postponed for the last six month. “The IMF is ready to start talks with the Hungarian government as soon as debated issues over the sovereignty of the central bank (NHB) are resolved, the Fund’s resident representative Iryna Ivaschenko said last week. IMF has had serious concerns about the last year amendments of the Central Bank Act that allows the parliament to expand the monetary council of the MNB by delegating four new members to and to transfer executive power from the governor to the monetary council during Governor András Simor’s term, which will expire in March 2013. Both key problematic issues seems to persist even in the modified version of the Central Bank Bill about which the parliament will vote at the beginning of June.

Leagal steps of  goverment raise dobts in market players. “Talks will therefore not start after the passing of the amendments. The IMF will remain firm," Attard Montalto analyst at Nomura in London told major Hungarian business newswire




„Current market interest rates might easily push state debt management to the edge of a downward debt spiral,” Tamás Gerőcs said. Such yields have driven  Greek, Irish and Portugese economies into a sovereign debt crisis even though they used to perform better than Hungarian economy does now. „What is more, if IMF refuses to give a financial aid, market yield of state bond might well jump over 10 percent,” Gerőcs added.

This might easily question whether Hungarian politicians responsible for state debt issue are aware of the situation. “Strange as it is, they are,” Krisztián Kovács, senior consultant of Concorde Brokerage reassured the skeptic in his blog. “Like many other European governments struggling with credibility deficit and reluctant to comply to European financial and political norms, Hungarian government has made attempt to get financing from big powers out of Europe that posses huge foreign exchange reserves.” China, Russia, as well as  wealthy Arabian countries were targeted by Hungarian diplomacy in order to achieve favorable refinancing for expiring Hungarian state debt. “As a matter a fact, no success attended their efforts,” Kovács commented on the fruit of diplomatic aspirations.

„So Hungarian government has tried at least to make a split between the IMF and the European Uninion,” the senior consultant of Concorde Brokerage wrote in his blog on Hungarian economic diplomacy has made serious effort to agree at least with the IMF. „The idea laying behind was simple. The IMF should not lay political claims, even though consequences of loan condition would seriously impact domestic social policy,” he added. On the other hand, EU seemed harder to convince about the compliance of governing Fidesz party’s domestic policy with the European standards. „Any sort of diplomacy based on the split between IMF and EU has very littly chance to secced,” as real decision makers are not international oraganizations but the governments of the big o involved,so Kovács” arguing goes. No agreement about out of market financing of Hungarian steate debt is possible without the endorsement of Germany. „ Whichever  is asked for delivering Hungary’s credit appliance, the addressee will be Angela Merkel,” Kovács concludes his blog.



Both critical issues of amending the old Central Bank Act  targets the transfer executive power of the bank’s governor to a monetary council loyal to the government,” Tamás Gerőcs told the BBJ. However, one can only guess how the government would use its influence to the central bank.

Prime minister Viktor Orbán has many times publicly referred to the foreign exchange reserves of HNB which «has reached exactly the size of Hungarian state debt denominated in foreign currencies ». Erraneous as it is, such belives might l lurk behind amending the Central Bank Act.

„As a matter of fact, foreign exchange reserve was about 38,5 bn EUR in April, while state debt amounted to 73 bn EUR a half of which has been denominated in euro,” Gerőcs acceted the „basis” of Orban’s reasoning. Financing the latter from the former, however, is a faulty concept by any means. „Legally speaking, HNB is not the owner of  the foreign exchange reserve, it is only a custodian of reserve. The central bank simply cares the foreign exchange account of the commercial banks” Gerőcs said. „More importantly, reducing the reserves would have an adverse effect, namely such a step increase forint’s vulnerability. Speculats would make use of the relative scarsity of central bank”s tools to defend Hungarian curreny,” Gerőcs concluded.

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