Will the troubled country accelerate European meltdown?
Q: Hungary is in meltdown! I thought Greece was Europe’s basket case.
A: Hungary does look like Greece Mark II. Just look at the facts: the forint has been the world’s worst performing currency in the past six months, plunging 15 per cent against the euro since June. It dropped to a new record low this week. The yield on 10-year government bonds is at an unsustainable 10.8 per cent. Standard & Poor rates Hungarian government debt at BB+, which in layman’s terms means junk. The IMF is in town, but won’t lend. Oh, and there are mass protests in Budapest calling for the government to resign.
That bad, eh. Will Hungary default?
It is now clear that Hungary can no longer fund its deficit on the bond market. On Wednesday it scrapped a 10bn forint (£25.7m) 10-year bond issuance, saying that the yield was too high.
So, er, is that a Yes?
Not quite. The IMF is willing to lend Hungary the money it needs. But there are conditions. The Hungarian government must undo the controversial reforms which have undermined Hungarian democracy, according to critics.
Controversial reforms? They can’t be too bad…
Well, the prime minister, Viktor Orban, admits foreign journalists are “right” to call his scheme “regime change”. He’s enacted a completely new constitution. In brief: Orban forced out judges en masse and replaced them with political appointees, diluted constitutional scrutiny by the courts, created a new post at the central bank which the prime minister can control, and gerrymandered the electoral boundaries. The number of state-recognised religions has been slashed from 362 to 14. The constitutions “recognize(s) the role of Christianity in preserving nationhood”. Abortion is unconstitutional. The word republic has been removed from the country’s name – now just Magyarország (Hungary).
It’s a coup – hence those mass demos in Budapest.
Will he get away with it?
The Venice Commission for Democracy through Law of the Council of Europe, the European Parliament and the United States have all denounced the coup. And the IMF and EU are refusing to lend to Hungary unless the changes are reversed.
If Mr Orban won’t back down, how long till Armageddon?
A few months. The Hungarian government has a war-chest stocked with former IMF loans, windfall taxes on banks and other sectors such as telecoms and energy, and the $14bn in assets it got by nationalising private pensions.
Surely Hungary can just print money? That’s the advantage of having your own currency.
The common assumption is that they can whirr the printing presses and churn out more forints. But the Hungarian government can’t and won’t print money to fund the deficit. For two reasons. Gabor Ambrus, head of emerging markets at economic analysts 4Cast, tells LondonlovesBusiness.com: “The Hungarian central bank is independent of the government. The government can’t order it to print money.
“Also, the Hungarian forint is different to the dollar, pound or euro. It is not an international reserve currency.” Printing would cause depreciation of the forint, which, says Ambrus, is problematic: “Hungary has so much FX debt that printing money would create more problems than it would solve. It is absolutely out of the question.”
So the Hungarian government must obey the IMF and abandon the new constitution?
Two other possibilities exist. Here’s Ambrus of 4Cast again: “Default is one possibility. Or the government could appropriate central bank reserves via various changes in legislation. Obviously this would leave the forint exposed and cause major currency problems.”
Should Londoners be worried?
Not really. Hungary is not part of the Eurozone, and its debt was 82.6 per cent of GDP in September – way below Italy at 121 per cent, or the real basket case, Greece at 160 per cent. British banks have little direct involvement with Hungary. A senior economist in Budapest tells me: “There is no big exposure from the UK to Hungary. The main banks here are German, Austrian, Italian and a few French. The effects would only be secondary, and the UK has the firewalls and facilities to handle a default in Hungary.”