Hungary’s Orban – the war may not be over

February 9, 2012

Throughout history, Hungary has not shied away from taking on formidable foes, be it the Ottomans, Habsburgs or the Soviets. More recently it squared up to no less redoubtable opponents: the IMF and the EU… before seemingly thinking the better of it.  Despite having questioned the EU’s authority with the line “Brussels is not Moscow”, Hungarian PM Viktor Orban appeared to yield to the IMF and EU last month, pledging to backtrack on contested legal reforms in order to resume crucial aid talks.

This is because Hungary has a bigger battle on its hands. Its foe? Debt — an enemy much easier to face if the IMF has your back. And investors think so too.

While revived risk appetite has boosted most emerging markets in 2012, Hungarian assets have also benefited from Hungary’s seeming rapprochement with the IMF/EU.   The forint has gained nearly 10 percent against the euro, stocks have rallied 15 percent and the cost of insuring the country against default has fallen nearly 200 basis points.

But is this bullishness justified? Has Hungary definitively conceded defeat in its IMF/EU battle in order to win its fiscal war? Gaelle Blanchard, emerging markets strategist at Societe Generale says investors believe in the future of the alliance.

If we see some more difficulties…there may well be some corrections, but the market is clearly now pricing in a deal.

It is all up to Orban. The European Commission gave him until Feb. 17 to address concerns over new laws or face legal action and the risk of more delay in aid talks.  If the talks resume, a new IMF/EU deal, desperately needed by Hungary to pay back both bondholders and an earlier loan package, may well contain riders requiring Hungary to step up its austerity measures, says Blanchard.

The problem is if you want to reach a fiscal target, some difficult measures will have to be taken, that’s for sure… it’s still very much a political game right now.

Having already faced protests over government austerity drives last year, Orban will fear the consequences of imposing further cuts on an already disgruntled public. The ousting of Romania’s prime minister this week over IMF-backed cuts serves an example of the repercussions of aggressive fiscal campaigns.

Meanwhile, the self-styled ‘political warrior’ is being careful not to reveal too much of his battle plan, telling an audience at an annual keynote speech on Tuesday:

We have stood and will stand for Hungary and Hungarians, in  a determined and unshakeable way, but always reasonably. We are ready to fight if needed, but also to agree in the interest of the country.

(By Alessandra Prentice)

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