Identifier
Created
Classification
Origin
09BUDAPEST28
2009-01-09 16:04:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Budapest
Cable title:  

SCENE-SETTER FOR THE VISIT OF DAS JUDY GARBER

Tags:  PGOV PREL ECON HU 
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VZCZCXYZ0018
PP RUEHWEB

DE RUEHUP #0028/01 0091604
ZNR UUUUU ZZH
P 091604Z JAN 09
FM AMEMBASSY BUDAPEST
TO SECSTATE WASHDC PRIORITY 3773
UNCLAS BUDAPEST 000028 

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR DAS GARBER AND EUR/CE

E.O. 12958: N/A
TAGS: PGOV PREL ECON HU
SUBJECT: SCENE-SETTER FOR THE VISIT OF DAS JUDY GARBER

UNCLAS BUDAPEST 000028

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR DAS GARBER AND EUR/CE

E.O. 12958: N/A
TAGS: PGOV PREL ECON HU
SUBJECT: SCENE-SETTER FOR THE VISIT OF DAS JUDY GARBER


1. (SBU) Over the past four months, the GoH has been reacting
to a series of crises that have gripped the nation's
attention, beginning with the financial market crisis in
October, followed by an ongoing diplomatic row with Solvakia,
transportation sector strikes in December, and now the
growing crisis over the supply of gas from Russia.


2. (SBU) Governing without a Parliamentary majority and
consistently trailing well behind FIDESZ in public opinion
polls, Prime Minister Gyurcsany's government has worked hard
to present itself as managing crises that they did not
create. But they have yet to make good on their promise to
"return to reform" in order to address the structural issues
necessary to promote growth and to prevent a protracted
economic downturn. Although contacts increasingly believe
that the government will remain in place at least for the
near term, they expect few dramatic steps - particularly with
the 2009 European Parliamentary elections approaching.


3. (SBU) On the economic front, the international
stabilization package appears to have staved off the
immediate crisis, and has helped stabilize the bond and
currency markets. In recent weeks the government securities
market has shown gradual signs of recovery, as domestic
demand for government bonds and demand at auctions is
increasing, although senior officials admit, "there is no
appetite for Hungarian paper." On the other hand, use of the
IMF and EU lines of credit to meet part of the government's
financing needs has allowed Hungary to reduce its level of
new issuances, reducing supply pressure in the bond market.
Non-resident bond holders remain net sellers, and it is
unclear when foreign investors will have the confidence to
return to Hungary's financial markets or when there will be
sufficient demand for government securities to increase the
level of new issuances to pre-crisis levels. Similarly, a
rapidly dropping inflation rate and greater stability of the
forint has allowed the Hungarian Central Bank to slowly begin
to roll back its October emergency 300 basis point interest
rate increase.


4. (SBU) Thecountry is bracing itself for a difficult road
ahead, however, as the Government imposes expenditure cuts in
order to meet commitments made to the IMF to accelerate its

deficit reduction program. News from the fourth quarter of
2008 is overwhelmingly negative, including record lows in
savings and consumer confidence, and a steep drop in
industrial production. The impact of the global economic
slowdown is likely to increase as layoffs and company
shutdowns increase.


5. (SBU) The first formal IMF review of Hungary's performance
in implementing its loan commitments is scheduled for
February. Although it appears to be on track to meet its
deficit reduction targets, pressure from public sector
workers' unions has already caused the Government to dip into
budget reserves and roll-back some of its planned austerity
measures affecting workers in the enormous public sector.
There is also a risk that a worsening of the economic
situation could make 2009 deficit reduction targets more
difficult to meet - particularly given the temptation to
increase spending in an election year.


6. (SBU) Looking ahead, initial estimates of a 1 percent
contraction in the economy for 2009 are now considered
optimistic, as some analysts now suggest the figure will
likely be closer to 3 percent. The IMF predicts that Hungary
will not achieve its potential growth rate of 3 percent until

2011. Senior officials admit that Hungary's growth is "at
the mercy of the fortunes of Western Europe", given the
economic importance of exports to Germany, Italy, and other
Western European countries, and the fact that Hungary's
current macroeconomic situation makes it impossible to use
fiscal policy for economic stimulus.


7. (SBU) Economists and the international business community
continue to call for structural economic reform in order for
Hungary to remain competitive and achieve higher levels of
economic growth. Prime Minister Gyurcsany has recently
renewed his calls for reform in local government
administration, taxation and pensions. But both the public's
willingness to accept difficult reforms and the Government's
ability to enact them remain open questions. As this vicious
circle of weak leadership and partisan gridlock persists, so
does the risk of public susceptibility to the message of
increasingly visible, vocal, and violent extremists.


8. (SBU) You are scheuled to take part in the joint State
and Defense Department European anti-corruption conference,
and are scheduled to open the conference with Justice and Law
Enforcement Minister Tibor Draskovics, although he may cancel
due to a newly-scheduled cabinet meeting. A close and
long-time confidant of the Prime Minister, Minister
Draskovics has served in a variety of Ministerial capacities.
Now presiding over law enforcement as well as legal issues,
he is a key player on transparency, tolerance, and border
security.


9. (SBU) Your meeting with MFA State Secretary Laszlo
Varkonyi is an opportunity to cover the waterfront. Varkonyi
is an experienced diplomat whose portfolio includes the U.S.
(and most of the world outside of Europe). He'll welcome the
latest news from Washington, and may be able to update us on
the GoH's views regarding recent Portuguese efforts to
promote EU engagement on Guantanamo detainees. You might
also use this opportunity to update the MFA on the lack of
progress in concluding a new bilateral tax treaty, and given
its importance to the bilateral relationship, seek greater
MFA engagement on the issue.


10. (SBU) You are also scheduled to meet with professor and
political commentator Tamas Magyarics. Since your last
meeting with Magyarics, he has been named Deputy Director of
the International Center for Democratic Transition. An
excellent embassy contact, Magyarics can offer his
perspective on the full range of foreign and domestic issues,
including intolerance and extremism.


11. (SBU) For a perspective on the state of the Hungarian
economy, we have scheduled a meeting with Kristian Orban and
Tamas Vojnits, two impressive young economists with a great
grasp of Hungary's myriad problems. Together they run
Oriens, a locally owned M&A advisory and private equity fund
management firm, and they authored a study in 2007 on
economic reform in Hungary. Though associated with the
opposition, Orban was called in to advise the GoH in
formulating the stabilization package. Not only can they
provide a good perspective on what reforms Hungary needs, but
also have a good sense of the political climate for reform.


12. (SBU) Finally, you are scheduled to meet with members of
the Prime Minister's Foreign Policy Advisory Board. Led by
international legal scholar Laszlo Valki, the Board provides
informal advice to the PM and has served as a useful parallel
channel on the full range of bilateral issues.


13. (SBU) We look forward to welcoming you in person.
Foley