Hungary’s last-minute funding deal with EU averts market selloff

© Reuters.

By Gergely Szakacs and Anita Komuves

BUDAPEST (Reuters) -Hungary’s last-minute deal with Brussels to secure billions in EU funding next year will help it avert a severe hit to its currency and bonds, while keeping Budapest under some scrutiny from corruption risks.

Prime Minister Viktor Orban’s government is looking to sign funding agreements with the European Union within days.

But a part of the funds will flow in next year only if the central European country meets all conditions to curb corruption risks and boost its judiciary’s independence.

The deal reached on Monday sorted out financial aid for Ukraine and Budapest’s approval for a global minimum corporate tax in exchange for EU flexibility on funds.

It was for the first time that the EU froze cohesion funds to a member state over an erosion of democratic values. PM Orban has denied damaging the rule of law in Hungary.

“We have a performance timetable that was agreed in September. So far we have met all conditions, the last stage of this process will come at the end of March,” Hungary’s chief EU negotiator Tibor Navracsics told a news meet on Tuesday.

He said parliament would pass another tranche of legislation by end-March to access the suspended funds – pandemic recovery funds and 6.3 billion euros, or 55% of EU cash, that Hungary is due to receive until 2027 from the EU budget.

He said the funds could start coming from April.

Monday’s complex deal, a result of months of wrangling between EU institutions, will help Hungary avoid a worst-case scenario of irrevocably losing 70% of 5.8 billion euros ($6.11 billion) of EU recovery funds.

Poland, whose access to COVID-19 recovery funds have also been withheld due to rule-of-law concerns, is still trying to reach an agreement with Brussels that would unblock the cash.

“An agreement between the EU and Hungary was inevitable. Senior EU officials don’t want to push Orban further into the arms of (Russian President) Putin or trigger a Hungarian financial crisis,” said Mujtaba Rahman, managing director at think tank Eurasia Group.

“And Orban will still need to implement reforms before any money flows.”

VULNERABILITY EXPOSED

In the absence of a deal, the forint and bonds would have sold off, analysts said, exposing Hungarian assets to negative shifts in global sentiment amid the Ukraine war and a surge in energy costs, which have increased the economy’s vulnerability.

Orban, in power since 2010, has cultivated close ties with Moscow and repeatedly stalled EU sanctions against Russia. He has fought with his EU partners over media and academic freedoms, migrant and LGBT rights.

International watchdogs say Orban has long channelled EU funds to oligarchs close to his Fidesz party to entrench himself in power. Orban says Hungary is no more corrupt than others.

The battered forint, which has weakened 10% versus the euro this year and underperformed its peers, firmed over 1% on Tuesday, while government bond yields dropped 35-40 basis points.

The deal came at a time when Orban faces the biggest economic challenge in his rule as inflation is running at over 22% and still rising, interest rates are the highest in Central Europe, while the economy is slowing sharply.

Landlocked Hungary is also heavily exposed to imports of Russian oil and gas, and its gas bill has surged, widening its trade gap and current account deficit sharply, with the latter expected at around 8% of GDP this year.

($1 = 0.9489 euros)