CRISIS ON LAYAWAY: THE POLITICAL IMPACT OF THE

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 001103

SIPDIS

DEPARTMENT FOR EUR/CE; PLEASE PASS TO NSC FOR ADAM STERLING

E.O. 12958: DECL: 11/06/2013
TAGS: PGOV ECON HU
SUBJECT: CRISIS ON LAYAWAY: THE POLITICAL IMPACT OF THE
STABILIZATION PACKAGE

REF: A) BUDAPEST 1059 AND PREVIOUS

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


1. (SBU) Although the Parliament continues to debate the
implementing measures necessitated by Hungary's agreements
with the IMF and EU (ref a),contacts are beginning to
cautiously survey the longer-term landscape after weeks of
crisis management.

CONTROLLING THE NARRATIVE


2. (SBU) For the Gyurcsany government, the latest
characterization is one of a crisis that they solved but did
not cause. Identifying Hungary's near meltdown as
"two-thirds the result of foreign influences and one-third
the result of domestic political opposition," the government
is clearly seeking to portray itself as having delivered the
international assistance required to stabilize the economy.


3. (C) The government has done little, however, to go beyond
stabilization to structural reform. Defense Minister
Szekeres dismisses the PM's actions to date as "theater - and
bad theater at that," and Debrecen Mayor Lajos Kosa has
archly dubbed Gyurcsany "Conference Planner-in-Chief" for the
government's focus on discussion rather than action. Indeed,
at a time when many are calling for broader government
activism, Gyurcsany has publicly defined the government's
role as limited to obtaining EU subsidies and building export
markets while Hungary's Monetary Council promotes economic
growth.


4. (SBU) Investors and economic analysts continue to decry
the government's failure to pursue further reforms. Sandor
Demjan, investment mogul and one of Hungary's richest
citizens, notes that the stabilization package "is like an
oxygen mask for a patient. It will not heal him, it is not
an operation", and argues that "much deeper and fundamental
changes are needed...reforms must be seen through even if
they come with painful consequences." Among the reforms
Demjan argues for is to revamp the social welfare system to
ensure only those that truly need assistance are supported.
Describing the current system Demjan noted that "the safety
net below acrobats is there only for them," and not for
"throwing anyone in from the audience."


5. (C) The government's approach, however, is paying early
dividends with higher approval ratings for both the MSzP in
general and the Prime Minister in particular. Polling
commissioned by the Prime Ministry shows 63 percent of the
public supporting the bailout. The Socialists have been
further buoyed by our election results, which they regard as
portending what they are careful to describe as an "even
better relationship" with Washington.


6. (C) Still, the Socialists, while upbeat, are by no means
united. MP Attila Mesterhazy notes that Gyurcsany still
remains "the least bad option" for the party, and Defense
Minister Szekeres is once again hinting broadly that the PM
can't win in 2010 - while he could.

A TWO-MINUTE DRILL?


7. (C) But 2010 may not be the operative date. Although he
still regards "another two years of muddling through" by the
Gyurcsany government as the most likely scenario, FIDESZ
Parliamentary Faction Leader Tibor Navracsics believes that
the Prime Minister could decide to call for early elections
next summer if he wins reelection as MSzP Party President
next March. One FIDESZ source confided that the party had
even floated early elections as a condition of supporting the
stabilization package; others have suggested that a new
government should have been among the IMF's conditions. Many
in the party, however, fear Gyurcsany's campaigning skills
and are inclined to be careful of what they wish for.

JUST THE TWO OF US


8. (C) We note that both MSzP and FIDESZ sources are
increasingly confident in writing off the smaller parties.
Although the SzDSz and MDF still wield a degree of influence
as the swing votes required to pass legislation in
Parliament, polling continues to suggest that neither will
survive the next election and members of both parties are
admitting their concerns in private. Divided as always,
Hungarians are deserting the smaller parties - and at the
same time polls indicate they are concerned by the evolution
of a two-party system.

PLACE YOUR BETS

BUDAPEST 00001103 002 OF 002




9. (C) While they may agree that they will be the only two
parties left standing, the MSzP and FIDESZ are drawing very
different conclusions from the past weeks.


10. (C) For the MSzP, their best chance is to emphasize
their ability to deliver international assistance and to
ensure that austerity measures are equitably imposed.
Equitably, but perhaps not indefinitely: given the very
strong popular opposition to spending reductions announced
thus far - particularly among the pensioners who represent 20
percent of the electorate - we cannot help but suspect that
the government will revisit its decisions before the next
elections. As Krisztian Orban of the Oriens Consulting Group
observes, "the Hungarian state has gone from parasite to
predator," dependent on a "vicious circle" of taxing
investors to finance its domestic spending. "Thank God for
the Stabilization Package," Orban concludes, "but Heaven help
us since the government will choose the votes of pensioners
and the unemployed" over the advice of economists and
investors.


11. (C) FIDESZ is apparently betting that its criticism of
the stabilization package and support for tax cuts will play
better with voters who dislike the spending reductions (and
with investors who dismiss the government's commitment to
reform). At a briefing for the Diplomatic Corps on November
13, FIDESZ officials warned of the risk of a "social crisis"
if power remains in the hands of a government that "lacks
credibility." Political Capital analyst Krisztian Szabados
believes that FIDESZ is prepared to risk its "international
political credibility" in the short term in order to pursue
this approach.

CRISIS DEFERRED


12. (C) Comment: As Political Capital analyst Krisztian
Szabados observes, the danger of explosion is over but the
risk of longer-term implosion is not. But the economic
crisis has given Hungary's parties something else to fight
about rather than something to agree about. The government
did move quickly to secure economic assistance, receiving
what one senior AmCham official called "a reward for years of
bad economic policy." They will now try to do the same in
search of political advantage. The combination of a stronger
- but still weak - government eager to deflect blame and an
opposition eager to criticize gives little hope for
consensus. Without it, the stabilization plan will have
deferred - but by no means solved - the pressing problems
confronting Hungary. As Krisztian Orban concludes, "the
bail-out has bought us one year ... but without reform we
will remain one giant sub-prime mortgage." End Comment.
Foley