Hungary Pledges Central Bank Compromise With IMF in Exchange for Second Bailout

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Hungary received its third downgrade to junk on Friday as Prime Minister Viktor Orban sought to revive talks for an international bailout, backing down from an earlier confrontation with central bank chief Andras Simor.

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“The president can count on the government’s support, including our backing for him personally,” Orban told reporters after meeting with Simor today in Budapest. The Hungarian government wants an IMF agreement “as soon as possible” and will do “everything” to support the central bank’s efforts to stabilize the economy, said Orban.

The International Monetary Fund and the European Union ended bailout talks with Hungary last month after Orban refused to withdraw a new central bank regulation they said would undermine both monetary-policy independence and Simor’s authority.

Hungary lost Fitch Ratings’ investment grade on its foreign-currency debt today, the third such downgrade in six weeks. Standard & Poor’s followed Moody’s Investors Service in cutting Hungary’s debt to junk on December 21.

“The downgrade of Hungary’s ratings reflects further deterioration in the country’s fiscal and external financing environment and growth outlook, caused in part by further unorthodox economic policies which are undermining investor confidence and complicating” the process of coming to an agreement with the EU and IMF, said Matteo Napolitano, a director in Fitch’s sovereign group.

Talks with the EU and IMF broke down after Orban’s government passed a law that would take away Simor’s right to name central bank deputies, expand the rate-setting Monetary Council, and add a new vice president. A separate law would allow for the demotion of the central bank president if the institution should be combined with the financial regulator.

Economy Minister Gyorgy Matolcsy wrote in a letter to European Central Bank President Mario Draghi yesterday that the law, which came into effect on January 1, is “fully compatible” with EU rules, and that the Cabinet will continue to recognize the central bank’s independence.

Since taking office in 2010, Orban has shunned external interference in what he calls his “unorthodox” measures, which include reducing the power of independent institutions, effectively nationalizing $13 billion of private pension-fund assets, and instituting extraordinarily high industry taxes.

Now international organizations are using Hungary’s request for bailout funds to leverage institutional changes. According to an IMF staff report dated January 4, “such external support, which has been requested by [Hungarian] authorities, will only be available and effective to the degree it is based on a strong policy framework and a sound policy mix with strong ownership.”

The report recommends strengthening the central bank’s independence, greater fiscal policy oversight, paring down high industry taxes and changing the tax regime, and reorganizing public transportation companies. The report will form the basis of the IMF’s discussions with Hungary when they meet on January 18. The document has already been sent to the Hungarian government, which may add to it.

After meeting with Simor today, Orban said the government will consult with the central bank on a daily basis and the two will work together to ensure economic stability. Orban also said he sees a “good chance” for swift talks with the IMF, and hopes to obtain a loan “as soon as possible.”

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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