EAVESDROPPING; CONFIDENCE DROPPING: DOMESTIC

C O N F I D E N T I A L BUDAPEST 001000 SIPDIS DEPARTMENT FOR EUR/CE; PLEASE PASS TO NSC FOR ADAM STERLING E.O. 12958: DECL: 10/13/2013 TAGS: PGOV ECON HU SUBJECT: EAVESDROPPING; CONFIDENCE DROPPING: DOMESTIC ESPIONAGE AND THE ECONOMY REF: BUDAPEST 964 AND PREVIOUS Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D) ¶1. (SBU) Although largely eclipsed by the recent shocks to the stock and bond markets (septel),Hungary's domestic espionage scandal continues to expand in scope and could further complicate economic triage efforts. ¶2. (C) Although criminal charges against the suspect firm, UD Zrt, reportedly remain under investigation, FIDESZ Party President Viktor Orban indicates to us privately that the principal charges revolve around the importation of banned technical equipment and the targeting of local law offices engaged by Austrian oil giant ) and Hungarian Oil Company MOL rival - OMV. ¶3. (SBU) The case is increasingly being tried in the media as the parties present widely divergent interpretations of recent events. THE SPIN CYCLE ¶4. (C) The government continues to portray the UD case as the most serious scandal of the post-transition period. But portraying is not proving. Despite the broad imputations of politically-motivated espionage, even observers sympathetic to the government admit there has been no smoking gun. As center-left Progressziv Institut Director Kornelia Magyar observes, "I would have hoped that the government would not have made such serious allegations so lightly." ¶5. (C) To the opposition, the case represents the government's return to classical Communist tactics of distracting the public and intimidating potential rivals. Conservative commentator Ivan Baba draws a parallel to Moscow's treatment of Khodorovsky, charging that the government has employed the security services to smear the opposition and to warn influential UD clients such as OTP bank chairman Sandor Csanyi to stay out of politics. Orban maintains that the government has focused on Csanyi in the mistaken belief that he is funding FIDESZ, citing the government's actions as yet another example of the PM's focus on "tomorrow's headlines" rather than the nation's longer-term priorities. ¶6. (C) The object of the original allegations against UD, MDF Party President Ibolya David, suffered a political setback last week with the departure of another member of the party's parliamentary faction. Combined with the recent expulsion of David challenger Kornel Almassy (reftel),this latest step brought the MDF's ranks in Parliament down to nine MPs ) one below the limit required for formal consideration as a faction. After reportedly furious negotiation, the MDF announced October 13 that former FIDESZ MP Istvan Lengyel will join their faction, thus preserving the party's rights on issues ranging from public funds to committee assignments and speaking privileges. ECONOMY SHAKEN; POLITICIANS STIRRED? ¶7. (C) Comment: The shock waves within the MDF are an unintended consequence of the UD scandal, and there could well be more to follow. The involvement of OTP in particular could further undermine faith in Hungary's largest bank at a time when the economy needs to maintain confidence at home and abroad. The rapid descent of the domestic surveillance scandal into a morass of conflicting accusations and unintended consequences is the latest example of Hungary's tendency to distract and divide rather than to decide. Most observers agree that this week's counteraccusations from the opposition have gone a long way to even the score. But the disturbing tendency to reduce each issue to the lowest political denominator raises the question as to whether the body politic can rise above the partisan fray ) especially at a time when the country stands on the brink of serious economic consequences. End Comment. Foley