Haggling or juggling?


News about the amendment of the central bank act is frequently updated nowadays. The government is seemingly doing its best to comply to the requirements of the European Central Bank as the autonomy of the National Bank of Hungary (MNB) is a precondition of commencing loan negotiations with the IMF and the EU. However, it is still unclear whether the Orbán government really wants a credit agreement or just seeks to confirm its domestic bond market position by the fact of negotiation.

Early this week Antal Rogán, leader of the governing Fidesz faction announced that a totally new central bank act will be accepted bay the parliament by the end of June. The amended bill will fully comply with the requisites of the ECB concerning both the autonomy of the National Bank of Hungary (MNB) and its monetary council, let alone the direct authority of MNB's president, the Ministry for National Economy added.

It is a huge change respect to the early June version of the act which aimed to transfer executive power from the central bank's governor to the monetary council to which four new members would be delagated by the government.

The original version of the central bank act had gone even further intending to unify MNB with bank watchdog PSZÁF.

The underlying reason is rather straightforward. “The IMF is ready to start talks with the Hungarian government on a new loan as soon as debated issues over the sovereignty of the central bank are resolved," the Fund’s resident representative Iryna Ivaschenko said last week.

Mihály Varga, the freshly appointed cabinet minister responsible for negotiating with the IMF, in a recent television interview has reinforced  the government’s commitment to commence negotiations about a €15 billion euro „stand-by” loan before the end of summer.

The government's endeavour does not, however, mean that they would ideed agree with the IMF. " If they really wanted to, they would not have accepted a central bank bill last December that rides roughshod over MNB's autonomy," Krisztián Kovács, senior consultant of Concorde Brokerage wrote in his blog. What Hungarian government really needs is confidence which could be achieved by news about starting negotiations, economy experts say.

Is the loan urgent at all?

Theoretically, the govrnment has a good reason to hurry. The rates of an IMF loan would be much more 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 below 7%. According to debt experts, the interest rate of an IMF loan would hardly surpass 4%, 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 National Bank of Hungary (MNB) told at 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 stemming from the refinancing of expiring state debt add up to an even more dramatic sum, as an amount equal to 5,5 billion HUF will be due this year. “Almost the half of the maturing bonds are denominated in foreign currencies which cannot be swapped into forint. The domestic bond market would not simply shoulder it,” Tamás Gerőcs, senior analyst at Equilor Investment House told the BBJ.

Stressful for the central budget as they are, credit burdens have not constrined the government to comply with norms of European Central Bank. However, deepening European overeign-debt crisis well might compel Budapest to change its positions.  

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

"Like many other European governments struggling with credibility deficit and reluctant to comply with European financial and political norms, the Hungarian government has made attempt to get financing from big powers outside Europe that posses huge foreign exchange reservesKrisztián Kovács, senior consultant of Concorde Brokerage reassured the skeptics in his blog. ." China, Russia, as well as wealthy Arabic countries were targeted by Hungarian diplomacy in order to negotiate favorable refinancing schemes for expiring Hungarian state debt. "As a matter a fact, no success attended their efforts," Kovács commented on those diplomatic manoeuvres.

Mailmen to Merkel

"So Hungarian government has tried at least to treat the IMF and the European Union separately," the senior consultant of Concorde Brokerage wrote in his blog on Index.hu. Hungarian economic diplomacy has made serious efforts to agree at least with the IMF. "The underlying idea was simple. The IMF should not make political claims, even though consequences of loan conditions would seriously impact domestic social policy," he added. On the other hand, the EU seemed harder to convince that the governing Fidesz party’s domestic policy complies with European standards. "Any diplomacy based on the split between IMF and EU has very little chance to succed, as real decisionmakers are not international oraganizations but the governments of the big powers involved," Kovács argued.

No agreement about out of market financing of Hungarian state debt is possible without Germany's approval. "Whichever postman is asked to deliver Hungary’s credit appliance, the addressee will be Angela Merkel," Kovács concludes in his blog.


So why to challange IMF with the Central Bank Act?

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

Prime Minister Viktor Orbán has referred several times to the foreign exchange reserves of MNB which «have reached exactly the size of Hungarian state debt denominated in foreign currencies ». Erraneous as it is, the concept of financing the latter from the former might lurk behind amending the Central Bank Act.

"As a matter of fact, the foreign exchange reserve was about €38,5 billion in April, while state debt amounted to €73 billion , half of which has been denominated in euro," Gerőcs accepted the "basis" of Orbán’s reasoning.  "Legally speaking, MNB is not the owner of  the foreign exchange reserve, it is only a custodian of reserves. The central bank simply takes care of the foreign exchange account of the commercial banks," Gerőcs said. "More importantly, reducing the reserves would have an adverse effect, namely such a step would increase the vulnerability of the forint. Speculators would make use of the relative scarcity of the central bank”s means to defend the Hungarian currency," Gerőcs concluded.

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