Q+A-Hungary’s Fidesz government after the IMF/EU talks

BUDAPEST, July 19 (BestGrowthStock) – Hungary’s centre-right Fidesz
government has spooked markets for the second time in less than
two months, bringing talks with the IMF/EU to a premature end.
Following are analysts views on what Fidesz is doing and why:

IS FIDESZ TRYING TO BUY TIME FOR LOCAL ELECTIONS?

Fidesz won a parliamentary election in April on the promise
of generating growth and jobs through tax cuts, which appears to
have been its only economic policy plan, analysts say.

Global markets have taken a sour turn, however, and the
government was forced to abandon its budget loosening policy. It
has done so half-heartedly, and the programme it was forced to
put forward in June reflects a resentment toward austerity.

Fidesz hopes to maximise popular support for the local
elections on Oct. 3. Before ousting the Socialists from power in
April, the party had won voters by campaigning against a series
of austerity measures by the left. Coming out with such measures
of their own would risk alienating swathes of the electorate.

If they are to consolidate their power at the local level
that will give Fidesz 3-1/2 years without an election, giving
the government a freer hand.

Hungary’s existing IMF/EU agreement will expire by October,
giving Fidesz enough time to secure a safety net to fall back
on. It remains to be seen whether the patience of markets will
last another two months.

IS THERE A DANGER FIDESZ WILL RISK CONTINUED MARKET SELLOFF?

Yes, there is. Fidesz’s popularity is rooted in a populist
agenda that eschews austerity. To execute its agenda —
supporting families and small businesses at the expense of
taxing banks and multinational firms — Fidesz needs to control
local governments.

The breaking point will likely come soon after the local
elections, which will coincide with writing next year’s budget
and the expiry of the current IMF/EU aid deal. If Fidesz does
win local elections with a strong mandate, it can relax the
populist agenda.

WHAT IS FIDESZ’ ECONOMIC PHILOSOPHY?

The party has proposed legislation to lower the tax burden
on households and companies and wants the financial sector —
mainly banks with west European parents — to foot the bill.

The choice to put pro-growth minister Gyorgy Matolcsy in
charge of the economy reflects the idea that deficits can be
reduced not just by spending cuts but also by measures
increasing the country’s potential growth.

The clash over the deficit between the government and
lenders masks a deeper philosophical divide between the
expansionary and the restrictive school of economics at a time
when most EU governments are forced to tighten their belts.

Fidesz, which wants to distance itself from leftist
governments of the past 8 years, loathes the idea of austerity
for fear of being branded the same as the Socialists.

Its efforts to meet the 3.8 percent of GDP budget deficit
goal centre on a financial sector tax. Fidesz’s reluctance to
introduce harsher spending cuts and its insistence on the bank
tax strengthened its populist image among investors.

Other measures, most notably a planned pay cut at the helm
of the central bank, further enhance this image.

WHO MAKES THE DECISIONS IN FIDESZ?

Prime Minister Viktor Orban, 47, is the ultimate decision
maker in both the Fidesz party and the government.

Orban is the strategist when it comes to politics, while in
economic matters he is said to be listening mostly to Matolcsy,
who has a pro-growth vision of policy which differs from that of
fiscally-focused former Socialist prime minister Gordon Bajnai.

Orban is advised by experts including ex-cental banker
Gyorgy Szapary and former finance minister Mihaly Varga, but it
is Orban who puts the final seal of approval on all major
decisions. He has a tight grip over his party and the cabinet.

Getting back into power with an unprecedented over
two-thirds majority in parliament in April was his biggest
victory and gratification for elections lost in 2002 and 2006.
Orban plans for the long term and has envisaged the next 15-20
years of Hungarian politics would be defined by “one central
political force” — his Fidesz party.

Stock Market Today
(Reporting by Gergely Szakacs, Marton Dunai and Krisztina Than;
Editing by Janet Lawrence)

Q+A-Hungary’s Fidesz government after the IMF/EU talks