Tight budget but there is money for buying shares in MOL?

It was three days ago that Tibor Szanyi, a maverick socialist politician, came out with a surprising piece of news. He claimed that the Hungarian government wants to buy a 21% stake in MOL, the Hungarian oil company. That 21% was originally owned by an Austrian oil company, which subsequently sold it to Surgutnetfegaz, a Russian concern a year and a half ago. I wrote about the whole controversy earlier. You might want to take a quick look at it for a better understanding of the present situation.

Szanyi wanted to find out what Viktor Orbán and Viktor Zubkov, first deputy prime minister of Russia, talked about at the beginning of October. The subject of the conversation is not public, but subsequent government moves indicate that the Hungarian government wants to purchase Surgutnetfegaz's 21.2% stake in MOL. According to Szanyi the purchase would be costly: 420 billion forints. He wanted to know whether there is any connection between the "nationalization" of private pension funds and the proposed purchase of Surgut's stock.

When I first heard Szanyi talking about this rumor I paid no attention to it. I thought that, as usual, Szanyi was exaggerating. Surely, the Hungarian government in its present situation is not planning to purchase costly shares in MOL. However, it seems that Szanyi was well informed. MTI reported in the early afternoon of October 21 that Tamás Fellegi, minister for economic development, told the Budapest correspondents of Bloomberg that "Hungary is planning to purchase Surgutnetfegaz's 21.2% share in MOL before the end of the year." MTI quoted Fellegi as saying that "in our opinion it would be useful from the point of view of the state to become a shareholder of MOL through the purchase of Surgetneftegaz's shares."

I think this is quite clear and hard to misunderstand, but it seems that Fellegi made a mistake and a retraction came within hours. The ministry's press department denied that Fellegi said anything of the sort and in fact they asked Bloomberg to correct their report on Hungary's planned purchase of the Russian company's shares. Here is the explanation of what Fellegi allegedly said. "Tamás Fellegi, minister of national development, announced at the negotiating table between representatives of the Russian Federation and of Hungary that the negotiating partners must handle the questions of the energy sector in a complex way. They wish to work out the framework of the whole sector during the meeting of the two prime ministers before the end of the year." So, Hungary is not buying the shares before the end of the year. They want to finish the negotiations before that date. The spokesman also denied that there are any negotiations going on between the Hungarian state and the Russian company.

It seems that the reporters for Bloomberg were pretty sure that they heard Fellegi right, and I assume they thought that the explanation they received made not the slightest sense. Thus this is what they came out with at the end: "The Hungarian government would find it  'beneficial' to become a shareholder in central Europe's largest refiner MOL Nyrt. and may use market financing for a potential purchase of OAO Surgutneftegaz's stake in the company, National Development Minister Tamas Fellegi said." Not much of a change in wording.

Fellegi was quite explicit about the Hungarian government's plans. He told correspondents Edith Balazs and Zoltan Simon of Bloomberg that Hungary may be able to finance a potential transaction from the market "based on the preliminary feedback we've received." And he added: "I''m not worried about raising the necesssary funds, should the government wish to."

Apparently there have been rumors about the possible purchase since the summer. Index, a well-informed online paper, is sure that there will be an agreement, only the timing is in question. Index also asked an expert who didn't want his name to be revealed who claims that the deal would be good only for the seller. Surgut purchased the shares at $87 which today are worth $108. So, it would realize a 24% profit in a year and a half. According to the same analyst, it wouldn't be a good deal for Hungary because the government would have to borrow money in order to conclude the transaction. At present Hungary is capable of borrowing at 5.6-6%. At this rate it would cost Hungary 28 billion forints a year just to service the interest on the loan. If the transaction were funded by selling ten-year bonds, the financial loss due to paying dividends and paying back the loan would be close to 50 billion forints.

What I don't understand is why Hungary is contemplating adding to the national debt at a time when the country's financial situation is such that it can borrow money only at relatively high interest rates. After all, Hungary is one of the most indebted countries in Europe, around 80% of its GDP, and Fidesz in the past often brought up the sins of the socialist governments that increased the national debt by close to 30%. Moreover, lately there have been statements by different Fidesz politicians to the effect that the national debt will be gradually reduced starting next year. All in all, I'm puzzled.