A credit rating near junk level, economic instability at home and a depreciated forint are weakening Hungary’s credibility to steer the European Union as it takes the reins of the EU’s rotating presidency on 1 January.
As the forint dives and central bankers tussle with the government, the picture of Hungary’s financial problems is worsening, casting doubts over the country’s ability to preside over a critical mass of EU economic reforms.
Fitch, a credit-rating agency, cut Hungary to the brink of junk debt status, saying deficit-cutting measures in the 2011 budget passed by parliament on Thursday (23 December) could send the country down an unsustainable fiscal path towards a further downgrade.
To get the budget within EU limits in 2011, the government is relying on unorthodox, one-off revenues, making markets fearful the fiscal gap will bulge again after 2012 unless more durable measures are introduced.
Doubts over Hungary’s outlook
Doubts over the Hungarian economic outlook originally stem from an IMF decision to suspend a $25.1 billion loan after the international lender and the government disagreed on how the country’s budget deficit could be reduced.
Economists at BNP Paribas have reiterated a point made by Moody’s credit rating agencies that Hungary’s headline budget figures don’t tell the full story.
“We have long been cautious over the country’s risk profile and remain negative on local assets and the forint in particular,” an unnamed economist at BNP Paribas said.
The political and financial backdrop for Hungary’s tenure is not encouraging and analysts argue that the country’s debt problems have not gone anywhere but have merely been overshadowed by Greece and Ireland.
As the country celebrated Saint Nicholas day on 6 December, Moody’s downgraded Hungarian debt to near junk status and threatened to go lower still.
To make matters worse, Hungary’s ruling Fidesz party is embroiled in a row with its central bank over fiscal policy, causing the bank to spike interest rates.
“The Orbán government has swept Hungary’s financial problems under the carpet with temporary fixes, but they’re refusing to consider significant long-term reforms,” argues Joe Litobarski, an EU blogger known as Eurogoblin.
Hungary’s row with its central bank does not look like it will be resolved soon as the Fidesz party has called for the bank’s governor, Andras Simor, to resign after he accused the government of warding off investors.
Analysts also cast doubt on the country’s ability to interpret and take heed of the movements of financial markets.
Eva Balogh, a Hungarian academic at Yale University, blasts Hungary’s interpretation of disquiet on the market. “They believe that the banks by way of the markets are putting pressure on the Hungarian government,” Balogh said in a television interview.
“I guess I don’t have to point out that this whole theory is nonsense and only shows the ignorance of men like Lázár about the workings of the international financial markets,” Balogh continued
In addition, observers have cast doubt over Hungarian diplomats’ knowledge of draft EU proposals to police the bloc’s debt problems. “If you ask anybody at the presidency questions about economic governance, I doubt they will know what you are talking about,” said an EU commentator in Hungary who wished to remain anonymous.
Steering the EU’s economic agenda?
But Hungarian diplomats beg to differ. As one diplomat rattled off a list of economic governance policies to EurActiv over the phone, he argued that Hungary will have just as much credibility as any other country sitting around the EU table.
According to the diplomat, Hungary will oversee four key economic reforms during its term: a treaty amendment to legitimise the European Stability Mechanism (ESM), a permanent bailout fund, the creation of the ESM itself, six draft policies on policing EU debt (the economic governance package) and the European semester allowing the European Commission to oversee national budgets.
In January, the EU will also start its first “semester” of budget surveillance, with countries reviewing each others’ draft annual budget before they are adopted at national level.
The diplomat played down any fears that Hungary’s economic outlook could worsen during its presidency. “Hungary is one of the countries with the best budgetary situation at the moment,” he said reacting to economists’ gloomy forecasts.
The country currently has the lowest budget deficit (3.8%) of any EU country but high public debt at 80%.
He said the Fidesz government will “not be seeking a second credit agreement with the IMF.”
The diplomat also denied charges that a non-euro country will not have enough influence in upcoming new policies and instruments that principally affect the euro. The ESM is designed for euro area countries only, but all 27 countries will have to approve the upcoming treaty amendment for the system to enter into force.
“No treaty agreement, no ESM,” the diplomat warned.
There are also rumours that decisions on the ESM will not be limited to euro area countries only. Non-euro countries have allegedly been invited by Jean-Claude Juncker and by Belgian ambassadors to join discussions on the bailout facility.