Reforms Are Not Enough Anymore, Hungary Needs Stabilisation Too

Hungary's forint peaked above 270 against the euro on Friday morning, a depreciation of more than 8% within 24 hours, as interbank FX swap markets froze and some market participants worried that the biggest domestic bank, OTP Bank, may be in trouble.

Bokros said the drastic easing of the HUF was “only a transitional phenomenon, a swing with no roots in the real economy," adding that as soon as currency markets settle down, this major volatility will probably disappear.

“The level of the exchange rate is not important. What matters is its stability and the calculability of its changes. [...] The key task remains to keep pursuing a consistent economic policy - once that is achieved, attacks against the forint will cease or become less powerful," Bokros told business daily Napi Gazdaság in an interview published on Monday.

Hungary is not prepared for euro adoption, it is the last among the Visegrad Four (Czech Republic, Hungary, Poland, Slovakia) in this respect, it is the only ex-Socialist country that meets none of the Maastricht criteria, Bokros said. “It is no wonder investors' confidence in the forint has declined, which causes bigger volatility - at least in the short term."

Regarding the credit crisis and the changed lending environment Bokros said “the problem is that a great many banks - not in Hungary, but in Western Europe and primarily in the USA - stop or suspend lending, at least for the short term. This means that even the highest-rated debtors cannot get a loan".

(Since the publishing of the interview, Hungary's MKB Bank, a unit of Bayerische Landesbank, has announced to suspend the issuance of (new) foreign currency loans to protect clients from violent currency swings.)

Bokros said that when the Federal Reserve decided to enter the market of commercial papers as a buyer, i.e. started to take part directly in corporate lending in the two-tier banking system, it has made a Socialist move. “This is Socialism, as the last time we saw a single-tier banking system was in the Soviet world."

To a question whether the International Monetary Fund (IMF) has enough capital to become a safe haven, a last resort in the crisis, Bokros said it had at least someone to give money to.

“IMF extends loans not from its capital, but from the bonds it issues, and as it is a governmental organisation, confidence in it is relatively high. The main problem of the IMF has been that there was no one it could lend to. Now it has - it can give unlimited credit to many countries and central banks."

Bokros said Hungary already needs both stabilisation and reforms.

“[...] two months ago I would have said only reforms are necessary. The list comprehensive reform was carried out in Hungary exactly ten years ago, the reshuffling of the pension system. Since then there were anti-reforms rather then progress. This implies that (the country's) balance may prove to be fragile, and this demands stabilisation."

Source: Portfolio Online FInancial Journal