Identifier
Created
Classification
Origin
09BUDAPEST275
2009-04-06 15:32:00
CONFIDENTIAL
Embassy Budapest
Cable title:
THE BAJNAI RECOVERY PLAN: DRASTIC MEASURES FOR
how-toVZCZCXRO0587 PP RUEHAG RUEHROV RUEHSR DE RUEHUP #0275/01 0961532 ZNY CCCCC ZZH P 061532Z APR 09 FM AMEMBASSY BUDAPEST TO RUEHC/SECSTATE WASHDC PRIORITY 4067 INFO RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY RUEAIIA/CIA WASHINGTON DC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY RUEATRS/DEPT OF TREASURY WASHDC PRIORITY RUCNMEM/EU MEMBER STATES COLLECTIVE
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
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