Hungary has given investors sleepless nights in recent years. Continual disputes with the IMF over a possible bail-out package spooked markets, although in the past few months the recovery in risk appetite has made it easier for Hungary to finance itself and thus keep an austere rescue package at bay.
Early last year it launched an authoritarian constitution that undermined the courts and increased the powers of the ruling Fidesz party, shocking Europe and incurring legal action from the European Commission. Now Fidesz is tightening its grip on the central bank.
The new governor, György Matolcsy, is already known to global investors for wayward policies, such as nationalising private pensions. The fear is that he’ll manipulate monetary policy to suit the government’s desire for growth (the economy is currently shrinking) rather than maintain its independence and focus on inflation, especially since elections are due next year.
If Matolcsy is aggressive in cutting interest rates, or if market sentiment in eastern Europe sours again as the euro crisis worsens, Hungary could be back in trouble as bond yields rise and the currency slumps, says Capital Economics. Hungary seems determined to turn into a “nationalist fortress”, says Andras Szigetvari in Austria’s Der Standard.