Hungary has little chance of joining the Exchange Rate Mechanism (ERM-2), the anteroom to the euro, as long as the forint remains highly volatile, central bank (MNB) Governor András Simor said.
Simor also told weekly HVG on Thursday that a rise in the country’s state debt must be stopped, which is only possible if the budget produces a sufficient surplus or Hungary’s growth potential is boosted.
He said many people believe it would be good for Hungary to enter the ERM-2 because the volatility of the exchange rate would then decrease, but this issue is more complex than that.
Simor said the European Central Bank and euro zone members would probably only approve Hungary’s entry if they saw a good chance of the forint’s exchange rate versus the euro staying within the ERM-2 trading band.
“As long as the exchange rate (of the forint) is as volatile as it is now, I think there is very little chance for us to be accepted into the ERM-2,” Simor said in the interview published on www.hvg.hu.
The forint, which has been sliding along with other central eastern European currencies on economic and financing concerns, fell to a record low of 312.25 versus the euro on Wednesday.
When asked if a forint level around 300 to the euro was a threshold where Hungary’s financial stability could be at risk, Simor said: “There is no such exchange rate level, or more precisely, this threshold constantly changes in light of the global economic situation and due to the continuous adjustment of the domestic economy,” Simor said.
“In October and November an exchange rate of around 290 triggered liquidity tensions. By now banks, even though with difficulty, have managed to adapt to the current level,” Simor added.
Simor said a $25.1 billion rescue loan from the International Monetary Fund and the EU ensures that Hungary can finance its debts and public finance needs, but the government must do everything to lead the country back to a track where it does not need external help.
He said steps announced by the government last month to reshuffle taxes and spending in order to boost the economy, which is expected to contract by 3.5% this year, were not sufficient.
“As, according to the central bank’s forecast, GDP will decline both this year and next, the level of state redistribution could rise even further. To avoid this, a much more radical cut in taxes and spending would be needed,” Simor said.
He said a medium-term strategy and brave measures would be necessary. “What we have now, is mere struggling without a perspective,” he said. (Reuters)