Hungary — the good, the bad, and the conditionality | FT Alphaville

Hungary — the good, the bad, and the conditionality

Hungary — still in basket-case mode earlier on Thursday… (a snapshot courtesy of Bloomberg):

The government sold 35 billion forint ($140 million) of one-year bills, 10 billion forint less than targeted, data from the Debt Management Agency on Bloomberg show. The average yield rose to 9.96 percent, the highest since April 2009, from 7.91 percent at the last sale of the same-maturity debt on Dec. 22…

But we still think Hungary’s major problem isn’t its struggle to raise cash.

There’s a fair bit of cash still in reserve and the government won’t have to roll over most of the debt maturing in 2012 until later in the year. (Most debt maturing in the year’s first half is to the IMF – €1.5bn out of €2bn – according to JPMorgan) This is exactly why the government thinks it can play for time in duelling with the IMF and EU on the terms of a bailout.

And that’s the really fascinating thing here — Hungary’s awful policies, and what conditions the EU and IMF are demanding about changing them. It feels a bit like the unstoppable force meeting the immovable object, since the Fidesz government has hard-wired some policies into the constitution that it just changed. Plus, it has a huge parliamentary majority which might not be repeated in future years, so now is the time for the EU and IMF to press for change.

Any government has to talk conditionality when going to the IMF. It’s particularly an issue when they’re cruising towards a Stand-by Agreement (the deluxe version of IMF bailouts where the Fund is breathing down the government’s neck on policy) rather than the precautionary credit agreement Hungary wants (but definitely won’t be getting by now). Even so we find the sheer range of demands by European and IMF officials another thing that makes Hungary a little different to most crises.

It’s not very often the EU would ask for media legislation to be changed before it sent money, for example, or that the IMF board would possibly have to consider US objections to a country’s new constitution. But both those considerations may be factors in Hungary. Quite a step-change from the IMF bankrolling Belarus in 2009 (admittedly a terribly-constructed programme, as it turned out).

We’ve seen Hungary described as a “falling angel” in financial terms, i.e. there is more selling of Hungarian assets at the margin at the moment because it’s just on the cusp of a junk credit rating. It might also be a good way to describe the way the EU in particular feels about Hungary’s politics — i.e. the fear that it’s just starting to turn away from ‘real’ democracy means all these conditions are being enforced all the more.

In the meantime it’s led to some confusing negotiating gambits…

For example, we understood as late as last night that the IMF would not even talk to Hungary unless there was a change to the new central bank law first — the same position as the EU and ECB. The Fund’s position may be more subtle: the IMF could start talking if the Hungarians made a declaration of intent to reverse the law later on. Even then it may be a moot point if the EU holds the whip hand on when to open talks and is pushing for far more conditions — meaning the IMF won’t open formal negotiations independently.

So an agreement to change the central bank law might be an ice-breaker. An analyst from BNP Paribas suggested on Wednesday that the government could remove a particularly offending clause that allows it to appoint the deputy governor. The point, though, is that the IMF wants other key concessions, such as changes to “fiscal stability laws” (the laws mandate a flat tax). But those are the things that are getting glued into the constitution and are hard to change. This was a good summation by Peter Attard Montalto of Nomura of the problem:

The list of policy changes required is long, complex and fundamentally engrained in FIDESZ’s strategy and Mr Orban’s ideology of economic nationalism. It is much more complex than the very short list of likely conditions needed for formal negotiations to actually start.

And the last weird thing about the Hungary crisis — our opener notwithstanding — is the investor reaction. It’s not a panic (yet).

More to the point — and this is where Hungary is also more interesting than the ‘basket-case’ topline suggests — it does seem that the holders of Hungarian bonds might even be a little scared of going super-bearish. It’s somewhat contradictory with everything that’s going on. But we think it’s important to note that Hungary screamed bearishness all through 2011 — and the trade never actually worked.

Although that might be making Fidesz all too confident…

Related links:
The long march of Fidesz – The Economist
Stats on Hungarian government debt – AKK