Liberals Want Out Of The Coaliton With The Socialists

In practice this means that the SZDSZ wants out of the coalition.

The most likely scenario appears to be a minority governing by the Socialists, but it cannot be excluded either that the political tug of war that seems to be inevitable for one month will lead to Gyurcsány's ousting. Should any of these scenarios materialise, another option could be early elections.

The forint has kept falling against the euro and the BUX index dropped by some 300 points over the news.

Based on the above, the scenario previously thought to be the most likely seems to be finally materialising, i.e. the SZDSZ leaving the coalition for real after months of threatening the Socialists with the move.

Prime Minister Gyurcsány managed to get one step ahead of the liberals and dodge a political bullet by sacking Health Minister Ágnes Horváth today (with effect from 30 April), otherwise he could have shared the fate of his predecessor Medgyessy who was replaced by the Socialists on an SZDSZ ultimatum in 2004.

The sacking of Horváth and the recall of SZDSZ ministers from the government are both with effect from 30 April, which will conserve domestic political tensions for at least 30 days. The two governing parties thus have until 30 April to join forces and oust Gyurcsány if they believe that will cut the Gordian knot.

SZDSZ have 20 and the Socialists 190 MPs in the 386-strong Parliament. If the Socialists want to avoid turning into a minority government they need at least four liberals to remain supportive. If they bar Socialist MP József Karsai from the party, they will need 5 SZDSZ members. The fate of Karsai is being decided in these very minutes.

Neither the liberals, nor the top officials of the Socialists have been prepared to replace Gyurcsány. The question is whether this increases his maneuvering room or not. The main task ahead of the Socialists now appears to be preparations for governing in minority.

Hungary has never had a minority government since the change of regime and considering the depth of political precipices it may not be a viable solution at all. The short-term political power palette is but to be nice and smooth.

It may also be possible that the coalition members cast their differences aside and give the PM a grace period of six months. In view of the PM's belligerent attitude towards the SZDSZ we find this highly unlikely.

For this reason, we believe that the latest remarks by MSZP Vice President István Hiller that the Socialists do not want to break up the coalition is bad news for Gyurcsány.

From an economic point of view every possible scenario has one thing in common: 

Portfolio.hu viewpoint:

We believe every group within the ranks of the Socialist Party (MSZP), including that of the PM, see the essence of the reforms done with. The politicians of the MSZP interpreted their drastic defeat in the referendum as an indication that their reform solutions were rejected by the people therefore neither the coalition, nor a potentially minority government will embark on any major reform measures in the period left until elections in 2010. The Socialists believe their popularity could be propped by the moderation of the shocks caused by the fiscal adjustment, the inflow of EU funds and a more confrontational approach to the opposition.

A two-year governing without reforms is unlikely to be tolerated by investors and credit rating agencies under the current credibility status of the cabinet. There are signs underpinning this assumption already: the BUX index dropped 300 points upon the news, taking the intra-day plunge to 800 pts. The forint eased by about 1% to the euro in morning trade and kept eroding to around 261. On the fixed-income market the situation is even more dramatic: with practically no liquidity at all, the yield of the 3-yr bond is around 10%, while that of the 10-yr paper is around 8.8%. The spread between the buy and sell side widened to around 50 bps."

Source: Portfolio Online Financial Journal