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Hungary Goes Its Own Fiscal Way, Rebuffing the EU and IMF

Hungary is trying to rewrite economics and shrugging off advice from the EU and the IMF.
By Amiel Ungar
First Publish: 12/26/2011, 7:37 PM

The Hungarian currency, the Forint, has been declining and has dropped 9.3% this year. This is the worst drop since Hungary joined the European Union in 2003.

Hungary's 10 year bonds were trading at 9.39% interest. Other European countries sought a bailout when interest on their bonds reached the unsustainable level of 7%. Hungarian bonds have been downgraded to the level of junk bonds and interest is the 9th highest in the world.

Under normal circumstances, these developments would be raising all sorts of warning flags predicting an imminent default and this indeed is the verdict of some investment houses. By all logic, Hungary should be in feverish negotiations with the EU and the IMF to stave off the worst.

The government of Viktor Orban, however, with its super majority in parliament does not believe in conventional approaches.

At a time when countries such as Greece and Italy seek to win investor confidence by appointing sober bankers and economists to see them through the crisis, Hungary is doing the opposite by diluting the independence of its central bank. The president of the central bank is being deprived of his right to name deputies and could even legally face demotion. The current president, Andras Simor, called the current legislation an "almost total takeover" by the government.

The legislators have indeed been busy. They have written a new constitution, appointed party members to oversee the media and head the State Audit Office. The government has renationalized private pension funds. These measures have made a most unfavorable impression on the ratings agencies, but Orban is shrugging off the downgrades as part of a continent-wide epidemic.

“All of Europe is under attack,” Orban said. “Everyone is continuously being downgraded and we’re slowly getting used to it and it’s therefore losing its significance.”

While Hungary has asked the EU for a credit line, it has rejected the European Commission's entreaties to scrap the legislation weakening the independence of the central bank. As a result, the EU is not in a mood to help. The same applies to the IMF.

Orban is taking a 'what me worry' approach to this problem as well. "This whole thing isn't so significant. If we reach an agreement with the IMF, we have a safety net. If we don't, then we don't have one. The country will still stand on its feet and will continue to function."