Viktor Orban turns to foreign debt, much to his horror
Since taking power in 2010, Hungary's prime minister has sought to curb the influence of foreign creditors
Budapest — Hungarian Prime Minister Viktor Orban used the coronavirus crisis to consolidate his power at home, but now he finds himself having to cede some leverage to foreign investors.
His decade-long drive to shield Hungary’s economy from outside influence was derailed, at least temporarily, as the government quadrupled the amount it targets to borrow on international markets to fund its stimulus response. A day after announcing the plan, the government was selling euro-denominated bonds Thursday.
Since taking power in 2010, Orban has waged an “economic freedom fight” to curb the sway of foreign creditors, an echo of Russian President Vladimir Putin’s amassing rainy-day reserves and Recep Tayyip Erdogan’s aversion to the International Monetary Fund in Turkey.
Orban more than halved the share of public debt in foreign currencies, and planned before the Covid-19 crisis to eliminate it altogether. He credits the crusade for giving him room to consolidate power in a self-avowed “illiberal democracy” that has triggered clashes with the EU over the rule of law.
But now, under pressure to finance a stimulus package, his government announced it would sell €4bn in Eurobonds this year, the highest amount since 2013.
“Orban has tried to avoid Eurobonds because of the risk that a weakening currency raises the cost of servicing such debt and his manoeuvring room,” said KBC economist David Nemeth, who sees the deficit rising to 5% of GDP in 2020, almost double the government’s new 2.7% target.
The government is turning to international debt because of increased funding needs and because it’s unlikely to sell as many retail bonds to Hungarians as originally planned, the State Debt Management Agency said in a statement. Separately, the central bank will start its asset-purchase plan in May.
Hungary announced a benchmark-size sale of six- and 12-year euro-denominated bonds on Thursday, according to people familiar with the transaction who asked not to be named. Initial price talks for the notes were about 160 basis points and 195 basis points above mid-swaps.
The borrowing will increase dependence on foreign bondholders who, along with the IMF, Orban once denounced for demanding unpopular austerity measures. It may also signal that the deficit will exceed the EU’s ceiling, a limit he has been careful to observe to avoid exposing him to the only effective way the bloc can penalise him.
More than any other EU leader, Orban has fuelled concerns that nationalists may be using the pandemic as cover to eliminate checks and balances and tighten their grip on power. On March 30, he secured the right to rule indefinitely by decree, triggering a currency sell-off as concerns mounted that he was completing a decade-long transition to autocracy.
As one of his first actions, he heralded his economic plan, estimated at as much of a fifth of GDP, as the biggest in Hungary’s history. But entrepreneurs, economists and former central bankers ripped into it for failing to commit enough new funds, blaming Orban’s insistence on keeping the deficit in check.
The EU has said it won’t sanction members that breach the 3% of GDP deficit ceiling as a result of the pandemic, and Orban’s own finance minister, Mihaly Varga, said he’s ready to surpass it if needed, a rare contradiction of the premier.
“Those who now go on a spending binge will, in a few months, once the first wave of the crisis is behind us, find themselves hanged, pulled on strings by creditors and speculators,” Orban told state radio interview on April 10. He called a budget shortfall of 3% his “red line”.
The new borrowing plan suggests that Orban is more willing to expose himself to such risks. Facing the threat of angering voters, he may shift from prioritising the deficit to loosening purse strings, which may ultimately prove less costly politically with the government expecting the economy to shrink by 3%.
“Budget discipline is one thing,” said Viktor Szabo, a portfolio manager at Aberdeen Standard Investments. “But if your country is hit with a serious recession then that too can undermine political legitimacy.”