VZCZCXRO1637
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHUP #0681/01 1900851
ZNR UUUUU ZZH
R 080851Z JUL 08
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 3164
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 BUDAPEST 000681 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/NCE AND EB/IFD,OMA, AND INR/EC 
TREASURY FOR DAS ERIC MEYER, JEFF BAKER, AND LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: PREL ECON EFIN HU
SUBJECT: SCENE-SETTER FOR TREASURY ACTING DAS ERIC MEYER 
VISIT TO BUDAPEST 
 
¶1. (SBU) Your visit comes as the Parliament has recessed for 
the long summer "cucumber season."  With the dissolution of 
the MSzP-SzDSz coalition following the national referendum on 
elements of Prime Minister Gyurcsany's reform agenda this 
spring, the government is now feeling its way forward without 
a Parliamentary majority. 
 
¶2. (SBU) Despite continued progress since your last visit in 
March on deficit reduction, growth remains stagnant, 
transparency suspect, and unemployment slowly inching toward 
eight percent.  Higher fuel and food costs have kept 
inflation over 6 percent, and there is the constant risk that 
the government will revert to form and increase spending as 
the 2009 European Parliamentary and 2010 Hungarian national 
elections approach.  Economic uncertainty and political 
gridlock, in turn, have contributed to a climate where 
extreme "solutions" have gained currency and frustration with 
the system itself has gained traction.  As one AmCham 
executive stated, "Hungary is running out of time." 
 
¶3. (SBU) Your visit is on the heels of the recent IMF Article 
IV consultations, which concluded with a "favorable" 
assessment of Hungary's short-term, macro-economic indicators 
tempered by concerns over long-term sustainability.  The IMF 
team emphasized the country has made a good start in its 
deficit reduction plans but must continue with stalled 
structural reforms.  The country is also in the midst of 
celebrating the unexpected news of its recent selection over 
other countries in the region for a new Daimler car plant, 
expected to add another 1 to 1.5 percent to Hungary's GDP. 
We are, however, concerned that this perhaps undeserved vote 
of confidence, given the government's record on 
competitiveness, may heighten their aversion to reforms which 
could further damage their standing in the polls. 
 
¶4. (SBU) While the GoH has not set a target date for the 
Euro, the country's Euro Coordination Committee (co-chaired 
by the Finance Minister and National Bank Governor) recently 
released a plan stating that Hungary could join the ERM-2 in 
2009 with the possibility of setting a date for Euro entry at 
that time. 
 
¶5. (SBU) Your schedule begins with Ministry of Finance 
Director for International Relations Zsuzsanna Varga and 
Deputy Director Economic Policy Toth Laszlo.  Finance 
Minister Janos Veres has underscored his commitment to 
expediting resolution of the outstanding issues in our 
bilateral tax treaty.  He confirmed that the GoH will resume 
negotiations on July 7.  You may want to take the opportunity 
to ask for a status on the progress of these negotiations and 
to remind the Ministry of Finance of its end of 2008 
deadline.  Veres has also recently announced promised tax 
cuts for 2009 coupled with reduced spending and a further 
whitening of the economy.  Foreign businesses would 
particularly welcome the elimination of the 4 percent 
"solidarity tax," but we are concerned that the government's 
emphasis on "revenue neutral" measures indicates an intention 
to simply move to another tax category. 
 
¶6. (U) KOPINT TARKI Research Insitute Senior Researcher 
Attila Bartha will provide you with a general overview of 
macroeconomic issues in Hungary and the region. 
 
¶7. (SBU) We have invited former Finance Minister and Central 
European University Professor Lajos Bokros to lunch with you 
and Ambassador Foley.  His famous "Bokros Package" of 
austerity measures in the 1990s gives him great credibility 
on economic issues, and he has been a vocal and vigorous 
proponent of continued structural reform. 
 
¶8. (U) You will meet with Hungarian Debt Management Agency 
Director Andras Rez.  Rez will provide you an overview of the 
country's ability to maintain reductions in its current debt 
as a percentage of GDP, still the highest for the region. 
 
¶9. (U) Your meeting with Hungarian National Bank Deputy 
Director for Economic Analysis Agnes Csermely, comes at a 
time as the Forint strengthens against the Euro, breaking 
records at its highest level since the Euro was introduced. 
The National Bank also recently surprised the market by 
keeping the benchmark interest rate at 8.5 percent at its 
last session in June, which ran counter to its recent 
practice of increasing the prime rate. 
 
¶10. (U) Your schedule allows for some down time before early 
evening drinks and dinner. 
 
 
BUDAPEST 00000681  002 OF 002 
 
 
¶11. (SBU) We've arranged for you to have early evening drinks 
with Krisztian Orban, Oriens Investment Management Founder 
and Managing Partner.  Orban makes the rather compelling 
argument that high state expenditures, a high tax burden on 
labor, and the low labor supply creates a vicious cycle of 
low economic growth in Hungary.  His presentation has been 
provided to you separately by email and includes a proposal 
for reform to break this cycle.  This presentation was 
briefed to the leadership of the governing party, but we 
understand their emphasis on avoiding "social instability" 
led to the rejection of his recommendations. 
 
¶12. (U) You will have dinner with AmCham member and Deloitte 
Hungary partner Dr. Attila Kovesdy to conclude the day.  An 
expert on Hungarian taxes, Kovesdy can explain the mysteries 
of the country's cumbersome tax system and the tax reform 
plans being considered by the GoH. 
 
¶13. (U) We look forward to welcoming you in person. 
 
Foley