Hungary’s mysterious talks with IMF and EU
Last week the Hungarian government suddenly announced that it had initiated talks with the IMF about a new loan. This has happened after the populist government had long argued that a new deal was needed and Prime Minister Viktor Orban recently insisted that he would step down if his government would have to go to the IMF/EU for new loans. He, however, seem to have back-tracked on the promise, as his government now actively seems to be pursuing a new loan deal. That said, the announcement that “negotiations” were under way have surprised both the IMF and the EU and both institution have politely announced that they are “aware” of the Hungarian government’s intentions to get a new loan deal.
We are quite puzzled by the whole affair and must say that the Hungarian government’s communication with both international creditors and the markets have been very unorthodox. In that regard, it is noteworthy that the Hungarian government has already announced that it will not alter its economic policy or tighten fiscal policy to get a new loan deal as economic policy is “perfect”. Hence, the government apparently would be able to get a loan deal “for free”. That obviously is not going to happen and the fact that the Hungarian government has announced this further underscores that it is highly unorthodox in its economic thinking.
It is in this highly uncertain political environment that the Hungarian central bank next week will have to make its rate decision. We expect the MNB to stay on hold, even though we also believe that some Monetary Council members would likely want to see a fairly aggressive rate hike to curb the sell-off in the forint. With regard to MNB it should be noted that the central bank was apparently not informed about the Hungarian government’s intention to go to the IMF and the EU for a new loan. This in itself should raise the eyebrows of investors.
We are quite puzzled by the whole affair and must say that the Hungarian government’s communication with both international creditors and the markets have been very unorthodox. In that regard, it is noteworthy that the Hungarian government has already announced that it will not alter its economic policy or tighten fiscal policy to get a new loan deal as economic policy is “perfect”. Hence, the government apparently would be able to get a loan deal “for free”. That obviously is not going to happen and the fact that the Hungarian government has announced this further underscores that it is highly unorthodox in its economic thinking.
It is in this highly uncertain political environment that the Hungarian central bank next week will have to make its rate decision. We expect the MNB to stay on hold, even though we also believe that some Monetary Council members would likely want to see a fairly aggressive rate hike to curb the sell-off in the forint. With regard to MNB it should be noted that the central bank was apparently not informed about the Hungarian government’s intention to go to the IMF and the EU for a new loan. This in itself should raise the eyebrows of investors.