THE BAJNAI RECOVERY PLAN: DRASTIC MEASURES FOR

C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000275 SIPDIS DEPARTMENT FOR EUR/CE, EB/OMA, INR/EC; TREASURY FOR ERIC MEYER, JEFF BAKER, LARRY NORTON; NSC FOR JEFF HOVENIER AND KHELGERSON E.O. 12958: DECL: 04/03/2019 TAGS: ECON EFIN PREL HU SUBJECT: THE BAJNAI RECOVERY PLAN: DRASTIC MEASURES FOR DIFFICULT TIMES REF: A. BUDAPEST 250 ¶B. BUDAPEST 251 Classified By: Acting P/E Counselor Jon Martinson, reason 1.4 (b,d) 1 (SBU) Summary. Economy Minister Gordon Bajnai, who will replace Prime Minister Gyurcsany if Parliament's April 14 constructive vote-of-no-confidence occurs as expected (REF A),has identified new "painful" austerity measures to counter an increasingly gloomy economic outlook. These measures include cuts to pensions, public sector salaries, and social welfare benefits for families. This weekend, a majority of Socialist Party and Free Democrat MPs pledged support for his economic plan. Although political uncertainty and bleak economic news remain the order of the day, there are a few positive economic signs emerging, including the strengthening of the forint to a two-month high against the euro, and an easing of some liquidity problems. End summary BILLIONS IN ADDITIONAL CUTS EXPECTED ¶2. (U) Although not yet formally released, some details of Prime Minister candidate Gordon Bajnai's expenditure cutting measures have been made public. The measures reportedly include approximately HUF 600 billion (USD 2.6 billion) in cuts to ensure that Hungary's budget deficit is below 3 percent for 2009. ¶3. (SBU) Some analysts are issuing increasingly gloomy 2009 growth forecasts. The most recent came last Friday when financial research firm Penzugykutato projected a 5 - 6 percent decline in GDP for Hungary in 2009. Last week, Finance Minister Veres admitted publicly for the first time that Hungary's recession is likely to be significantly higher than the government's most recent forecast of minus 3.5 percent. He attributed this to an even steeper than expected decline in Germany and elsewhere in Western Europe. Although Veres did not give a specific figure, many analysts are now predicting negative growth of at least 5 percent for 2009. BAJNAI'S LIST ¶4. (SBU) Bajnai has circulated a list of planned austerity measures to Socialist (MSzP) and Free Democrat (SzDSz) Members of Parliament, and has insisted that they formally sign a pledge to support the measures before accepting the PM nomination. A majority of MSzP and SzDSz MPs agreed to the plan in separate meetings over the weekend (SEPTEL). The plan, entitled "Budget Conditions to Crisis Management," reportedly includes the following austerity measures: -Freezing of public sector employee wages for two years; -Eliminating the so-called "13th month" for public sector employees; -Not paying the second tranche of this years' 13th month pension; -Indexing pensions only to inflation, instead of inflation and gross wage increase (abolishing the so-called "Swiss Indexation"); -Temporarily freezing the family subsidy, and lowering the qualifying age from 23 years to 20; -Following a transition period, limiting maternity care payments from three years to two; -Limiting government subsidies on agriculture, public media, and the public transportation company; -suspending the housing subsidy; -decreasing the gas and central heating subsidy. ¶5. (C) Finance Minister Veres told the Ambassador March 31 that most of the cost-cutting measures in Bajnai's plan were developed by the Finance Ministry, although many of the measures mirror recommendations of outside groups like the Reform Alliance. According to Veres, a number of these measures were previously proposed internally by the Finance Ministry, but were not supported by Prime Minister Gyurcsany's government. ¶6. (C) Regarding his future, Finance Veres told the Ambassador that he did not know whether Bajnai would keep him as Finance Minister in the new government. The SzDSz is reportedly insisting that Veres be replaced with a non-political technocrat. Rumors recently began circulating BUDAPEST 00000275 002 OF 002 that Bajnai may choose Dr. Peter Oszko, Chairman of Deloitte Hungary, as Finance Minister to replace Veres. SLIGHT SPRING THAW... ¶7. (C) Comment. Although considerable uncertainty exists on the political front, the news on the economic front is not all bad, for a change. Despite a seemingly continuous downward growth projection spiral since last October, some analysts are increasingly optimistic in the medium term. Liquidity problems are beginning to ease, due largely to new swap facilities and other measures adopted by the Central Bank. The forint has been strengthening against the euro in recent days, closing last Thursday at a two-month record high. There is also a sense that Bajnai's economic crisis management program will help put Hungary on stronger macroeconomic footing, and help restore investor confidence. Exacting pledges of support from the MSzP and SzDSz in advance removes some of the uncertainty as to whether the measures will garner the required support for passage in Parliament. The fiscal responsibility law enacted earlier this year helps build investor confidence by ensuring government spending does not once again spiral out of control. ...BUT CLOUDS REMAIN ¶8. (C) Economic risks and uncertainties remain, however. Many investors have not yet returned to the government securities market, and external financing needs remain high. Hungary was recently downgraded by international credit rating agencies to near speculative grades, and there is concern that a number of institutional investors will be forced to divest should further downgrades occur. In addition, if economic conditions continue to deteriorate, it is unclear whether the GoH can find additional areas where cuts are possible beyond those currently planned that the public would accept. The possibility of further currency depreciation and the resulting increase in the number of nonperforming loans continues to pose risks to the health of the banking sector. The increasing number of defaults on mortgage loans has already left many banks with large illiquid real estate holdings. End comment. Levine