By: Dr. Mike Campbell
Hungary is a member state of the European Union, but it has yet to join the Eurozone, and its currency, the Forint (HUF) rises and falls on the whim of the markets. Hungary joined the EU in 2004 and has a population of some 10 million people and is a recipient of EU funding the so-called cohesion (or development) fund which is worth about €1.7 billion. It was obliged to agree to meet Eurozone convergence criteria that the deficit should be less than 3% of GDP and that public debt should be less than 60% of GDP as a condition of accession. Hungary’s current problems stem from the fact that it is drifting further away from convergence and is indulging in reforms to its banking system that breach EU requirements.
The EC has said that it will freeze 29% of Hungary’s cohesion funding from the New Year unless steps are taken to curb the deficit. The move would need the approval of the other EU member states and was described as “unprecedented” by the EC. The Commission is also contemplating legal action against Hungary over legislation said to restrict the independence of its courts and the central banks. Given the anger that the Greek debacle has caused within the bloc, it is unlikely that Hungary will find much sympathy for its position in the current climate.
The European Commission (EC), the IMF and even the USA are unhappy with Hungarian legislation which permits the government to appoint more deputy governors to the central bank, potentially undermining its independence. The bank has raised interest rates to 7%; the EU is forecasting that inflation in Hungary will hit 5.1% this year – the highest rate of inflation within the block – but the government is keen to cut rates in an effort to boost growth.
Hungary is trying to obtain stability funding from the EU and IMF worth up to €20 billion as a stand-by credit line. The yield on 12 month sovereign bonds is just under the 10% mark and the nations credit rating was dropped to “junk” by Standard and Poor’s in December, partially on concerns about constitutional reforms.