Hungarian-IMF negotiations that will not take place

It would be good to know what the real story is. Is it simply another case of bad communication or it is something more? Within twenty-four hours the Hungarian government seemingly reversed itself on the question of impending negotiations with the IMF.

It all started with the National Bank's decision not to lower the interest rate. András Simor, chairman of the central bank, normally gives a press conference at the conclusion of the meeting of the Monetary Council. Simor indicated that he was expecting higher inflation next year and a slower recovery than originally thought. The journalists also asked whether he knew of any government plans to resume negotiations with the IMF. Simor answered in the negative. As soon as the press conference was over, the Hungarian forint, which had been inching up during the previous week, began to slide. Earlier the exchange rate was hovering around 278 forints to the euro, by Monday night it reached 283. The next day at one point it traded at 286.23.

It was at this time that Bloomberg learned from the National Economy Ministry (NEM) that "negotiations [with the IMF] will likely continue in the autumn and an agreement will be reached." Today an economist and earlier central bank chairman, Péter Ákos Bod, wondered whether the reporting by Bloomberg was perhaps just a misunderstanding. However, what Bod most likely didn't realize was that the information reached the Budapest representative of Bloomberg by e-mail. It could have been no misunderstanding. The reporter quoted parts of the e-mail verbatim.

When the Bloomberg report was published, MTI, the Hungarian news agency, didn't quite believe it and inquired from NEM whether it is really the case that Hungary will resume talks with the IMF come fall. The ministry's spokesman confirmed the news although the packaging was somewhat vague. He didn't go into details but indicated that negotiations will continue since they were never broken off.

The Financial Times reported the beneficial effects of the news which "provided a boost to the forint, which had lost more than 2 per cent this week amid doubts about Hungary's growth and inflation outlook." However, there were people who had their doubts. "I am taking this statement with a very, very large pinch of salt…. This move is very odd given the strong anti-IMF rhetoric from the government," Peter Attard Montalto of Nomura said.

Well, Mr. Montalto was right. Late at night yesterday, Lajos Kósa appeared on TV to set things straight. Hungary will be in touch with the IMF but there is no question of new negotiations or receiving another loan. Well, that short appearance and announcement on TV2 had the predictable effect: the forint began to fall and Hungary once again was breaking news on CNBC. The forint, which had strengthened a bit the day before (around 281 forints to the euro) immediately weakened and by early afternoon it was over 284; the situation hasn't changed since.

Origo, an internet paper, tried to get in touch with Lajos Kósa, Mihály Varga, and György Szapáry, economic advisor to Viktor Orbán, but to no avail. Commentators simply cannot figure out what is behind this confusion. Perhaps "some sober voices managed to have the upper hand in the circle of economic advisors," but within twenty-four hours the political leaders torpedoed the plan because they considered such a move politically unpopular at home.

Bloomberg also reported "internal conflicts within the party," but most people simply don't understand what's going on in Budapest. Tim Ash, head of emerging market research at the Royal Bank of Scotland Group Plc in London, said: "Why the government needs to make it so clear at this stage why they are not going to seek to renew the agreement with the IMF is beyond me…. They seem determined to prove that they can go it alone, a strategy which could still end in tears."


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Odin's Lost eye
There is one thing that we should remember. The original ‘loan’ was to be drawn in several ‘tranches’ (slices). This is normal for the IMF as they can control the next instalment, if satisfactory progress towards correcting ‘things’ has not been made. However Gordon Bajnai did not take up the second tranche of the original loan. I suspect that the IMF at the moment is communication at a lower level through intermediaries. There is another player in the loan business. That is the ECB in Frankfurt. Although there is a linkage between the IMF and the ECB loans, the ECB has a little ‘wiggle room’ of its own. The Hungarian government’s spokesmen are as silent as fishes in water on that score. I also see the hand of the Hungarian National Bank in the foreign exchange markets. This is quite normal and is used to stabilise the markets. I have seen it before when some ‘Big Wig’ wanted to shift his fortune out of Hungary. Professor you report that ** “Royal Bank of Scotland Group Plc in London, said: “Why the government needs to make it so clear at this stage why they are not going to seek to renew… Read more »

Viktor can’t go cap in hand to the IMF money until after the local government elections in case it dents the Fidesz share of the vote.

David: “Viktor can’t go cap in hand to the IMF money until after the local government elections in case it dents the Fidesz share of the vote.” Like kincs on an earlier thread I don’t think the local elections will make any difference to the government’s attitude – I think this is wishful thinking on the part of analysts who would like to see FIDESZ pursue pro-market policies. What they fail to see is that there a risk – if not an especially large one – of voters with CHF mortgages protesting at the government’s failure to reduce their monthly payments on 3rd October. This risks increases the more the Swiss Franc rises against the Euro, and the more HUF falls against both. This risk is surely exacerbated by the current anti-IMF line, and while it is not going to dent the core 20-30% of the total electorate who consist of the FIDESZ core, it could undermine their chances in Budapest and some of its districts, and some of the larger provincial towns (especially those held by the MSZP in 2006). I’m sure Orbán understands this risk, and he is prepared to take, which suggests a deeper committment to this… Read more »

“It would be good to know what the real story. (sic) Is it simply another case of bad communication or it is something more?” I’m not sure there is any ‘strategy’ behind confusing the media and the markets with the government’s ‘bass-ackwards’ communications. They are idiots, pure and simple, and to look for some kind of grand scheme in all of this is like searching for a needle in the haystack. In the US, the administration puts out fact sheets and background briefs that are circulated to the most senior government officials in the wee hours and updated throughout the day. That is how you can at least try to ensure that all your senior officials are ‘singing from the same song sheet.’ What you see in Hungary is a complete lack of direction, control, and discipline among the senior leaders of the government, which leads to a breakdown in both pro-active and reactive communications.


I actually believe there is a lot of truth to Mark’s analysis. I know, at the same time however, the FIDESZ and the Govt are deeply divided on an economic strategy. Orban, I do not believe, has much of a view on policy and is focused exclusively on politics. The problem for the Govt and the country is the debt burden public and private will make a restructuring inevitable. People may feel a bit better today than under MSZP, but that is definitely temporary. When it all comes unglued, it will be interesting to see what the Govt does. I think they ramp up the nationalist rhetoric and go for broke.