MNI INTERVIEW: US-Hungary Swap Deal Sign Limits Will Be Tested

Hungary’s government will push fiscal policy to its limit by expanding giveaways ahead of April’s hotly-contested general election, leaving the central bank facing a “nearly impossible” decision of whether or not to respond with rate hikes, a former senior European Commission and policy advisor official told MNI, 

Prime Minister Viktor Orban’s readiness to spend his way to electoral success likely underpinned the announcement this week of an agreement with the U.S. of a currency swap line or flexible credit line believed to be worth up to USD 20 billion, said Izstvan Szekely, formerly principal advisor in the Directorate General for Economic and Financial Affairs of the European Commission.

“The government can continue to pursue targeted fiscal policies ahead of the next election unless and until the market moves against them. They clearly intend to maintain this stance until there is a significant market reaction, drawing on lessons from past experience,” he said in an interview.

“The government appears to have consciously chosen to push policy limits up to the market’s tolerance, as shifting course before that point would force them into politically difficult choices.”

Current polling numbers - which consistently show challenger Peter Magyar’s Tisza Party ahead of Orban’s ruling Fisdesz - are “fundamentally different” from those in any previous election in the past decade, Szekely said.

Recent spending decisions - including tax breaks for families, pension top-ups and large public-sector pay rises - are “clearly driven by election politics,” Szekely said, with the exchange rate and bond markets the only significant sources of fiscal restraint.

Government-subsidised loans risk further exacerbating already-existing distortions in corporate credit, Szekely said. 

“Interest rates are meant to ensure only viable projects proceed. The government seems to overlook this market mechanism and the associated risks.”

FISCAL TARGETS

The announcement earlier this week that the government had raised fiscal deficit targets for 2025 and 2026 to 5% of GDP, up from 3.7% and 4.5% respectively, means the likelihood of a ratings downgrade of Hungarian debt - currently one notch above junk with S&P - is increasing by the day, Szekely said. (See MNI EM INTERVIEW: Hungary Deficit To Exceed 4% GDP in 2026 - Loga)

Hungary’s debt management agency, the AKK, had already built up reserves in anticipation of the fiscal target revision and potential market turbulence, Szekeley said, noting that this year it has issued more forex bonds than have matured.

The extent of the increase in debt-to-GDP will depend heavily on the exchange rate, since a significant portion of government debt is denominated in foreign currency, he said, adding that any increase in the risk premium attached to Hungarian assets will leave the central bank facing difficult choices, with the question of central bank losses - totalling some USD 7 billion in 2023 and 2024 - “the elephant in the room.”

Hungary’s 1.5% of GDP output gap means overall policy support is warranted, Szekely said. Yet with a structural deficit little changed at around 4% of GDP, fiscal policy settings are negative or neutral, while monetary policy is “massively restrictive.” (See MNI EM INTERVIEW2: New NBH Chief Must Clarify Reaction Function)

NBH Governor Mihaly Varga is a “disciplined policymaker,” said Szekely, who was the central bank's research director and advisor to the governor from 1996-1999. However “soon the choice will be to raise rates or not—an especially difficult call as elections approach. The decision is nearly impossible.”

"And keep in mind that we currently have a central bank and a government that are on the same political side. After the election, the situation may be different; the two sides may cooperate less well. And that is never an easy position to be in.”

ELECTIONS

Should Tisza succeed at the ballot box, markets may not initially respond positively, Szekely said. He expressed confidence in the personalities likely to be involved in setting Hungary’s new economy policy direction for any Tisza government, but noted that restoring public trust “requires offering more than what is taken back, as the trade-off is asymmetric.

“The core challenge is not the situation itself, but rather the politics involved. While unwinding these measures is necessary, doing so politically will be highly challenging. Initially, however, a new government faces even bigger priorities—corruption, the court system, and resetting relations with Brussels —each of which demands difficult reforms.”