Hungarian Govt Plans Drastic Response to HUF Crisis

Key findings

 

• The current fall of the exchange rate of HUF is a result of irresponsible political statements made by leading politicians of Fidesz.
• The reaction of the financial markets is much more psychological than rational; the currency crisis is not justified by the economic and fiscal fundamentals.
• Political Capital expects the Hungarian government reacts to the crisis fast and will announce austerity measures to stabilize the budget and the exchange rate.

 

How to rock the market

 

Attending a conference in his hometown, Lajos Kósa, managing vice-president of Hungarian governing party Fidesz drew a parallel between the Greek and the Hungarian financial situation and warned of a looming state bankruptcy which lead to the nosedive of the Hungarian currency. The same day, Mihály Varga deputy prime minister suggested that he would reveal „masses of skeletons” in the cupboard that will worsen the budget deficit. At the same time, after his meeting with the Hungarian PM, President of the European Commission Manuel Barroso emphasized straightforwardly that Hungary must not abandon the route of restrictive fiscal policy. Viktor Orbán was quick to agree with him.

 

 

 

The ill-planned political statement by Mr. Kósa induced chaos and panic on the markets. HUF fell sharply, and the situation deteriorated after the spokesman to the PM, Péter Szijjártó appeared on a press conference to calm down the markets. He was not able to send a clear message to foreign investors; instead he started a long and ambiguous explanation in which he tried to combine empty political clichés designed for domestic voters with relaxing words for the markets. The result was disastrous.

 

 

 

 

 

 

 

How to boost the markets

 

Well before the Greek crisis, it was clear that Fidesz would not have wide room for manoeuvre in the economy . Political Capital had forecast earlier that Fidesz would continue with the disciplined fiscal policy.

The current crisis taught Fidesz a lesson: think twice before you talk. Apparently the whole chain of events was planned well before but derailed at a certain stage. It is very likely that the aim of the new government was to explain to the Hungarian people why the new government cannot deliver its election promises. The choreography goes as follows:

Step 1: Fidesz promises more spending and tax cuts during the campaign.
Step 2: Fidesz wins the elections.
Step 3: The new government audits the real situation of the economy and finds skeletons in the cupboard.
Step 4: As a response to the ‘skeletons’ the new government announces strict austerity measures to balance the budget while putting the blame on the previous government.

 

The above plan was put together by politicians and spin doctors not economists. They did not take into account the reactions of the markets before taking Step 3. Nobody listened to what Mr. Viktor Orbán said after his meeting with President Barroso. He suggested the announcement of an action plan in response to the crisis, as he put it, ’72 hours after the skeletons would be revealed.

 

Now Political Capital is positive that Fidesz will take step 4 shortly. We expect that the Prime Minister announces further austerity measures before next Thursday to balance the budget and the exchange rate. It is his best interest not to risk a deepening currency crisis and loose all credibility. We estimate that the austerity plan will be between 2 to 4 billion euros. Thus the government will be able to meet the 3,8% budget deficit target.