Identifier
Created
Classification
Origin
07BUDAPEST417
2007-03-21 08:48:00
CONFIDENTIAL
Embassy Budapest
Cable title:  

THIS OLD HOUSE: NEW CENTRAL BANK GOVERNOR SIMOR ON

Tags:  ECON EFIN HU 
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VZCZCXYZ0008
PP RUEHWEB

DE RUEHUP #0417/01 0800848
ZNY CCCCC ZZH
P 210848Z MAR 07
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC PRIORITY 0958
INFO RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L BUDAPEST 000417 

SIPDIS

SIPDIS

DEPARTMENT PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 03/18/2012
TAGS: ECON EFIN HU
SUBJECT: THIS OLD HOUSE: NEW CENTRAL BANK GOVERNOR SIMOR ON
REPAIRS AND REFORMS


Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)

C O N F I D E N T I A L BUDAPEST 000417

SIPDIS

SIPDIS

DEPARTMENT PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 03/18/2012
TAGS: ECON EFIN HU
SUBJECT: THIS OLD HOUSE: NEW CENTRAL BANK GOVERNOR SIMOR ON
REPAIRS AND REFORMS


Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. (SBU) Summary: Newly-appointed Governor Andras Simor met
with Ambassador Foley March 19 to discuss his priorities for
the Central Bank (MNB). He believes the economy is stable
and the Bank sound, noting his intention to focus primarily
on improving communication with the government, the
opposition, and the public. He was broadly supportive of
reform, emphasizing the necessity of marshalling the
political will to address "Hungary,s mentality as well as
its monetary policy." We strongly recommend appropriate
high-level meetings at Treasury and State during Simor,s
planned trip to the US April 14 - 15. End Summary.

INFLATION: SO FAR ...


2. (C) Responding to Ambassador Foley's question, Simor
responded that inflation is "on his mind" but noted that the
MNB's analysis had earlier projected an increase due to
"one-time factors" including tax increases. He believes the
inflation rate will slow in the second half of 2007 and reach
the target levels of 3% in 2008, helped considerably by the
stabilization of oil prices and the "stronger than expected"
performance of the forint.


3. (C) Simor could not explain the forint's continued
strength, but suggested that it is consistent with regional
norms. Hungary's high deficits and current inflation rates
place it outside the regional average, but he believes
investors still see Hungary in the regional context, viewing
"its similarities before its differences." He is generally
hopeful that growth will rebound by 2008-09, but admitted
that it is still "too early to tell" and that global events
would continue to exert a significant impact on the Hungarian
economy.

REFORMS: THE RIGHT DIRECTION


4. (C) Surveying the GoH's reform program, Simor noted that
the government had been "right in the general direction" even
though it had been "wrong on hundreds of details." He
pointed out that the government still retained sufficient
budgetary reserves and sees "no present danger of derailing."
He is concerned, however, that the government has focused

largely on "one-time measures" that will be politically "hard
to sustain" in the longer term. Referring to the referenda
put forward by the opposition, he also warned that the
government could absorb challenges to individual aspects of
the reform agenda but could not afford to "lose them all."

THE CURRENCY BAND: IN THEORY AND IN PRACTICE


5. (C) Turning to the GoH's maintenance of a currency band,
Simor readily conceded that the band is "not consistent" with
an inflation target regime "in theory," but commented that
the band "hasn't hurt us in practice." Any decision
regarding the elimination of the band must be taken jointly
with the government, and he does not see it "on the agenda"
in the near term.

INHERITING A GOING CONCERN


6. (C) Detailing his general approach to running the MNB,
Simor compared his appointment to inheriting an old house,
commenting that "there are some things I would have built
differently but can still live with." Among the changes he
does anticipate is a new focus on the Bank's communications
with both the government and the public. "We can do better,"
he noted, "without risking our independence," including by
informally sharing its experience in forecasting with the
relevant ministries. He has taken the same approach to
dealing with the opposition, reaching out to both FIDESZ
leader Viktor Orban (albeit unsuccessfully) and to
Parliamentary faction leader Tibor Navracsics to make clear
that he regards the MNB as a truly national institution.

REFORMING THE MENTALITY; IMPROVING ACCOUNTABILIY


7. (C) But, he concluded, the public bears a great
responsibility as well. The most important aspects of the
reform program "address our mentality and not our monetary
policy," challenging the deeply-rooted notion of the state as
"godfather and not service-provider." He regards the tax
system as the most crucial issue facing the government,
commenting that "Hungarians expect to be taken care of ...
and not have to pay for it." "Tax evasion," he noted wryly,
"should not be a point of national pride." He believes the
long-term solution lies in "reallocating rather than reducing
the burden" by adjusting the balance of taxes on income and
assets.



8. (C) Even more important, Simor continued, would be the
government's commitment to set an example of accountability
through enhanced enforcement efforts. Ultimately, he
concluded, "the system will not reform itself," and
politicians must marshal the political will to address the
underlying issues of corruption and party financing. To
date, he remarked, they have been "schizophrenic" - knowing
what is right but not daring to break with the advantages
offered by the status quo. Hungary, he continued, is "famous
for taking the right steps ... and then prematurely relaxing
the policies when there is some evidence of success" on
structural reforms, and he believes the government may come
under increasing political pressure to ease up as the 2010
elections approach.

TRAVEL TO THE U.S.


9. (SBU) Simor concluded by noting his plans to travel to
the US for IMF events April 14 - 15. He warmly welcomed our
offer to discuss additional bilateral meetings on the
margins, and we recommend that he be received by appropriate
senior officials at both Treasury and State.


10. (C) Comment: The positive reaction to Simor's
appointment reflects confidence in his business experience
and his political neutrality. (In response to the
Ambassador,s question, he felt the reason for the widespread
approval from financial observers was based on his "sensible"
decision making as a corporate executive.) Both traits were
in evidence in our meeting, and we anticipate he will take a
measured approach to address the priorities he has correctly
identified. End Comment.
FOLEY