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Back in November I took an optimistic view on Hungary, unlike many, if not most, Hungarians. I liked the Hungarian five-year bonds, and thought dollar- or euro-based people should accept the currency risk. This was after opposition-fomented riots in the streets, during continuing demonstrations in front of parliament, and after the prime minister had admitted to a long pattern of lying to the country about its economic position and prospects.

This wasn’t just perverse contrarianism. Hungary’s fiscal and current account positions were so bad that there was no longer any choice but to deal with reality. So it put together a very restrictive fiscal plan, with tax increases, subsidy cuts and an ambitious programme of structural adjustments. Nobody in the financial markets, or the Hungarian polity, would believe promises any more, so the government had to deliver results.

And so far they have. There are still riot police in front of the parliament and public administration, but the government has delivered better-than-promised results. This has been reflected in a strengthened Hungarian forint, continued rises in bond prices, and the early realisation of profit targets by fixed income investors. The five-year bond, which I thought was the best spot on the curve back in November, has seen its yield decline by more than 40 basis points from about 7.5 per cent, and the forint has gone from Ft260 to the euro to about Ft249. Dollar investors, of course, further benefited from the rally in the euro, to which the forint is loosely tied by exchange rate bands.

The question for the euro- or dollar-based fixed-income investor is whether the juice is out of the trade. I believe there’s still good relative value to be had in forint paper, looked at either as unhedged outright bond positions, or in the form of relative value trades in CDSs against other central European issuers.

Not that the sceptics are irrational. The initial effects of the fiscal reforms imposed since last autumn have mostly come from raising taxes and cutting subsidies, which while unpopular are relatively easy measures. However, according to the finance minister’s estimates, more than 80 per cent of the improvement in the fiscal position will have to come from longer-term measures.

Some of that, in fact nearly €25bn over seven years, is relatively easy money from EU transfer payments. However, in order for the government to see that money, it will have to continue to cut the fiscal and current-account deficit.

Usually it’s the finance minister who is cast as the heavy in countries undergoing austerity programmes, but in this case the government picked Tibor Draskovics, who runs the State Reform Commission, to impose the needed structural changes. That means getting fewer people to work harder and more efficiently. I don’t think he cares about whether he is popular, or not, which is a prerequisite for his position.

For example, he told me during a recent visit to New York: “We intend to cut public administration costs by 2 per cent of GDP by 2009.” That would be the equivalent of eliminating virtually all the US government’s fiscal deficit through lay-offs of civil servants. I asked him how many of the laid-off civil servants were being re-hired as consultants and contractors. With a wintry smile, he replied that “some offices tried that. We anticipated it. No.”

What about strikes by public employees? “That would be the reaction in Italy or France, but in Hungary, while people don’t know the details, they know changes are needed. They are also unhappy with the quality of service they are getting.” To deal with the latter, Mr Draskovics and his group are imposing performance benchmarks, and shifting to a heavily merit pay-based compensation system.”

Christopher Condon, the FT’s man in Budapest, agrees the government will be able to get its way without major opposition from the civil service unions. “First, there is no history of strong unionism in postwar Hungary. It’s very different from Poland in that way. Second, they have been beholden to the [governing] Socialist Party.” There are also cuts coming in schools, which have a fifth fewer students than 20 years ago, but the same or more staff, and in healthcare, which will be subject to German-designed productivity measures.

None of this would be easy anywhere, but I believe Mr Draskovics, and the rest of the Hungarian government, will follow through this time. Essentially, they have no choice. They can’t play a populist card, because they don’t have any left. Besides, if they succeed, there’s that EU money to be had.

They are lucky in that the country continues to have competitive unit labour costs relative to its European markets, and will continue to benefit from rising exports to the EU.

Headline inflation should come down to 5 per cent by the year end, and stay on that path, which should support bond prices.

For those who are thinking of taking their forint bond gains and leaving the game, I’d suggest leaving your chips on the table.

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