Hungary: forint tumbles as Matolcsy and Orbán make their moves

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The Hungarian forint plunged through the 300 per euro barrier on Monday as investors digested unexpectedly speedy moves by György Matolcsy, prime minister Viktor Orbán’s new man at the central bank, to impose his “non-traditional” brand of monetary policy.

Adding to the gloom was a warning that Orbán’s latest round of constitutional amendments, due to be voted on in parliament on Monday, may contravene European Union law.

The forint opened at 299.2 to the euro and fell to as much as 303.6 in early trading, its weakest since June last year, before recovering to about 301.5 at 15.45 GMT after Mihaly Varga, economy minister, rushed to assure markets that the forint’s weakness was only temporary and the government would act to reverse its fall.

Peter Attard Montalto at Normura Securities in London said investors were reacting to Friday’s news that Matolcsy had shifted responsibility for monetary strategy and financial stability from two deputy governors – Ferenc Karvalitis and Julia Kiraly – seen as orthodox technocrats, to his own appointment, Adam Balog.

“All of this is a lot swifter than we had thought,” Montalto said. “We knew Karvalitis and Kiraly would be sidelined… but we didn’t expect it to be this obvious and swift.”

He said investors were pricing in the fact that Matolcsy clearly wanted a devaluation to boost growth, and would bring in new policies to try to offset the impact of this on households, companies, banks and the government itself, all heavily burdened with foriegn currency debt.

Says Montalto: “They haven’t said how they will do this but they will probably provide liquidity from the central bank to a new state-owned banking system, so people can swap out their foreign exchange debts for cheap forint-denominated debt, with various write-downs. But this is all going on in the background. It will be the central plank of government policy going into the next election but so far the government doesn’t want to talk about it.”

If such a policy in fact emerges, Matolcsy can be assured of getting his devaluation whether he wants it or not: investors are unlikely to have much faith in the currency if the government mandates lending for political reasons at interest rates that take little account of credit risk.

Meanwhile, a leader of Orbán’s ruling Fidesz party said on Monday there was no reason to delay a planned vote on changing the constitution, in spite of weekend protests and a warning from Jose Manuel Barroso, president of the European Commission, that the changes could put Hungary outside European Union law.

Montalto said Monday’s vote was a further example of Orbán’s “sledgehammer approach” of proposing measures, dropping some of them in the face of EU and other opposition, then re-introducing them at the next opportunity.

“People are slowly getting used to” Orbán and Matolcsy’s “post-modern” approach to policy making, he said – particularly to the fact that “this is now a non-independent central bank”.

Related reading:
Budapest due to vote on constitution change, FT
Orbán’s threat to democratic values, FT Editorial
Hungary’s new central banker: it’s Matolcsy for “stability and predictability”, beyondbrics
Matolcsy: Hungary’s finance minister, conspiracy theorist, and central banker? beyondbrics

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