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Markets “not in the mood to find fiscal skeletons after Greece”

Markets “are hardly in the mood” for discovering fiscal skeletons in Hungary after the revisions of the Greek fiscal deficit, a major London-based investment banking group said.

In a report released in London to clients following a recent visit to Budapest, emerging markets analysts at Barclays Capital said it is “worrying” that Fidesz has been insisting “on this rhetoric on fiscal revelations” just as fiscal sustainability concerns are driving financial assets weaker, particularly in Europe's periphery.

“Yet we believe the situation (in Hungary) differs from that of Greece ... the issues raised by Fidesz at the moment consist largely of the inclusion of quasi fiscal activities that may not have to be fully captured by the EU's official ESA 95 rules ... (while) in Greece, by contrast, there seems to have been misreporting under the rules”.

Fidesz itself no longer seems intent on revisiting the 2009 deficit numbers, possibly reflecting the realization that a claim of “wrong” 2009 fiscal numbers would raise the issue of “misreporting” under an IMF program – a serious issue and no less embarrassing for the IMF than for the reporting country, Barclays Capital said.

However, against the backdrop of EU efforts to strengthen fiscal accountability and the relevant sanction mechanisms, it is difficult to see the EU giving any slack to a country that has been under the Excessive Deficit Procedure (EDP), is receiving financial assistance via the EU's BOP support fund and has the highest government debt ratio among non-euro-area EU member states. The IMF is less constrained by the EDP, but will likely want to avoid conflict with the EU and would want to ensure that Hungary's debt to GDP ratio will start declining in 2011, the report says.

On the tension with the MNB, Barclays Capital said that given the central bank's independence, also watched by the ECB, Fidesz “would likely have to resort to extreme tactics" - for example civil lawsuits - to force a "voluntary" resignation of governor András Simor. “The chances of success of such an approach would likely be slim, but the attempt alone would spook markets, in our view”.

Other strategies, such as merging the MNB with the financial markets watchdog and appointing a new head of the merged entity, “do not strike us as feasible ... (and) such moves would still not be compatible with the central bank's independence”, Barclays Capital said. (MTI – Econews)