The announcement triggered a sharp reduction in Hungary’s sovereign debt insurance costs to a year-to-date low and a fillip to the forint.
Hungary’s 5-year credit default swaps (CDS) traded around 355 basis points late in the session, marking the first spread below 360 basis points this year, while the forint initially rose around 1 percent to the euro.
Emerging markets analysts at JP Morgan said “Hungarian macro realism means negotiations with the IMF/EU are still on track to resume in November”, and most of these measures are “sensible and surprisingly orthodox”.
“While we remain skeptical that the new fiscal target of 2.7 percent of GDP will be met, in part due to our lower GDP growth forecast, we expect the deficit to be kept around the 3 percent of GDP limit” both in 2012 and 2013.
Most crucially, the government agreed to withdraw its plan to extend the financial transactions tax to the central bank — a controversial measure that had been a key sticking point with the Troika and was one of the key conditions for resuming formal talks.
Yet, “we still do not expect an IMF/EU deal to be concluded before 2013” as the IMF is likely to ask for further clarification of the some of the measures.
“We therefore believe it will likely take a few more rounds of talks before the sides conclude a deal, with the timing also likely to be dictated by market pressure”, JP Morgan’s analysts said.
Analysts at 4cast said that “overall, there are definitively a few good points in the plan that will take Hungary forward”. The scrapping of social security payment ceilings will only hit very high earners, and the online linking of retailers’ check-out tills to the tax office should indeed help to whiten the economy, they said.
Also, the financial transaction levy on the NBH “has never been more than a one year interest free loan from the central bank”, yet its scrapping is a step forward towards a deal with the IMF. In this respect it is a big plus, as is the fact that Economy Minister Gyorgy Matolcsy said that the views of the IMF and Hungary on fiscal issues are very close. Yet, after numerous setbacks, “we’d need to hear the same from the IMF to see real progress”, 4cast’s analysts said.