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 
 
¶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