July 19, 2010 / 5:59 PM / 9 years ago

Q+A-Hungary's Fidesz government after the IMF/EU talks

BUDAPEST, July 19 (Reuters) - Hungary’s centre-right Fidesz government has spooked markets for the second time in less than two months, bringing talks with the IMF/EU to a premature end. Following are analysts views on what Fidesz is doing and why:

IS FIDESZ TRYING TO BUY TIME FOR LOCAL ELECTIONS?

Fidesz won a parliamentary election in April on the promise of generating growth and jobs through tax cuts, which appears to have been its only economic policy plan, analysts say.

Global markets have taken a sour turn, however, and the government was forced to abandon its budget loosening policy. It has done so half-heartedly, and the programme it was forced to put forward in June reflects a resentment toward austerity.

Fidesz hopes to maximise popular support for the local elections on Oct. 3. Before ousting the Socialists from power in April, the party had won voters by campaigning against a series of austerity measures by the left. Coming out with such measures of their own would risk alienating swathes of the electorate.

If they are to consolidate their power at the local level that will give Fidesz 3-1/2 years without an election, giving the government a freer hand.

Hungary’s existing IMF/EU agreement will expire by October, giving Fidesz enough time to secure a safety net to fall back on. It remains to be seen whether the patience of markets will last another two months.

IS THERE A DANGER FIDESZ WILL RISK CONTINUED MARKET SELLOFF?

Yes, there is. Fidesz’s popularity is rooted in a populist agenda that eschews austerity. To execute its agenda — supporting families and small businesses at the expense of taxing banks and multinational firms — Fidesz needs to control local governments.

The breaking point will likely come soon after the local elections, which will coincide with writing next year’s budget and the expiry of the current IMF/EU aid deal. If Fidesz does win local elections with a strong mandate, it can relax the populist agenda.

WHAT IS FIDESZ’ ECONOMIC PHILOSOPHY?

The party has proposed legislation to lower the tax burden on households and companies and wants the financial sector — mainly banks with west European parents — to foot the bill.

The choice to put pro-growth minister Gyorgy Matolcsy in charge of the economy reflects the idea that deficits can be reduced not just by spending cuts but also by measures increasing the country’s potential growth.

The clash over the deficit between the government and lenders masks a deeper philosophical divide between the expansionary and the restrictive school of economics at a time when most EU governments are forced to tighten their belts.

Fidesz, which wants to distance itself from leftist governments of the past 8 years, loathes the idea of austerity for fear of being branded the same as the Socialists.

Its efforts to meet the 3.8 percent of GDP budget deficit goal centre on a financial sector tax. Fidesz’s reluctance to introduce harsher spending cuts and its insistence on the bank tax strengthened its populist image among investors.

Other measures, most notably a planned pay cut at the helm of the central bank, further enhance this image.

WHO MAKES THE DECISIONS IN FIDESZ?

Prime Minister Viktor Orban, 47, is the ultimate decision maker in both the Fidesz party and the government.

Orban is the strategist when it comes to politics, while in economic matters he is said to be listening mostly to Matolcsy, who has a pro-growth vision of policy which differs from that of fiscally-focused former Socialist prime minister Gordon Bajnai.

Orban is advised by experts including ex-cental banker Gyorgy Szapary and former finance minister Mihaly Varga, but it is Orban who puts the final seal of approval on all major decisions. He has a tight grip over his party and the cabinet.

Getting back into power with an unprecedented over two-thirds majority in parliament in April was his biggest victory and gratification for elections lost in 2002 and 2006. Orban plans for the long term and has envisaged the next 15-20 years of Hungarian politics would be defined by “one central political force” — his Fidesz party. (Reporting by Gergely Szakacs, Marton Dunai and Krisztina Than; Editing by Janet Lawrence)

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