Early September, Hungarian PM Viktor Orban rejected conditions which the International Monetary Fund (IMF) attached to the new precautionary credit facility (worth €15bn) that Hungary has been seeking to secure since November last year. At the time, sharp forint weakening amid rising borrowing costs led the government to announce plans to negotiate renewed financial support from the IMF and the EU. Since then, talks between the government and international creditors have proved inconclusive. The first major obstacle encountered by creditors was a law that was adopted soon after the request for a loan and potentially allows the government to have greater influence over key aspects of monetary policy through interference with the central bank. Hungary’s parliament amended the problematic piece legislation in July, removing the barrier to negotiations. However, meanwhile, Orban’s coalition has introduced a new set of ad hoc fiscal measures, including a financial transaction tax (FTT), which should take effect in 2013 and which is criticised as a potential new threat to the National Bank of Hungary's independence. Responding to the unorthodox proposals, the IMF put forward conditions for granting the credit line such as the abolition of the controversial FTT, demands for pension cuts or a hike in the retirement age.

Impact on country risk

The turbulent relationship that PM Orban maintains with Hungary’s potential creditors raises the question whether Hungary wants financial aid or not. At least it seems that it does not want it at every cost, as its population is under pressure due to a string of moot measures its government has adopted since assuming power in 2010 and which have eaten into Orban’s popularity. As a partial consequence, economic output has slowed down progressively, with Hungary (re)entering officially in recession in Q2 2012 and forecast to incur a real GDP contraction of 1.5 % (IIF) this year. On the other hand, if negotiations reach a clear impasse, interest rates should rise sharply and the forint would be subject to renewed depreciation pressures. As a result, foreign exchange denominated liabilities of households, companies and general government would be put under renewed pressure, with potential negative implications for consumption and output. The ball is now in Orban’s court.

Analyst: Florence Thiéry, f.thiery@credendogroup.com