While for six months the Gyurcsány government was incapable of hammering together a credible policy that would lead the country out of the crisis, everybody focussed on the central bank because of the Forint's recent nosedive. The question must be asked why András Simor, the governor of MNB, went skiing precisely in those darkest days in the first week of March when the exchange rate for a Euro was 317 Forints? Why is he not doing more to prevent the downward slide of the Forint? Is he at all suitable for his post - even though many saw him as the future prime minister?

In one house with the enemy

Simor has few allies - claims one person in the know. Yet, it all started with such promise: when in February 2007, Ferenc Gyurcsány appointed Simor as Zsigmond Járai's successor, analysts saw him as a good choice. Simor moved from the seat of president and chief executive officer of the Hungarian subsidiary of the auditing firm Deloitte Touche to that of governor of the central bank. However, his entrance was not too impressive: he arrived with only a briefcase and did not even bring along his own secretary.

This was not the case with one of his deputy-governors. Júlia Király, who is also being mentioned as a possible candidate for the post of prime minister, surprised everyone at the central bank when she invited Péter Tabák, the protegé of the minister for justice and law enforcement, Tibor Draskovics, to head the department for finanacial stability. Tabák had already worked at MNB, although according to sources he did not exactly shine as either a manager or as a professional. However, his political career progressed nicely: in 2003-2004 he directed the head department for economic and social policy in former prime minister Péter Medgyessy's cabinet office in the Prime Ministerial Office, then in April 2004 he moved to the Ministry of Finance as the head of the department for economic policy and as a ministerial consultant.

Simor regarded Tabák, Júlia Király and the other deputy-governor, Ferenc Karvalits, who always had leanings towards the post of prime minister and who Simor found it especially difficult to get on with, as political commissars imposed on him. It is public knowledge that Karvalits fancied himself in the governor's seat of MNB after Járai. However, the government wanted somebody at the helm of the central bank who enjoyed serious prestige with an international reputation and strong leadership abilities, and who however, would not seem like a politician. Despite Karavalits' ties to the left, he also moved in Fidesz circles after the change in the system. "The post of governor of the central bank is a political one. If they had thought that Karvalits was a Fidesz supporter, he would not have got the job," claims one of our sources.

Júlia Király is regarded as part of Piroska Apró's circle of friends, and although she hails from an old left wing family - she is the daughter of the academic István Király, who determined the line of literary policy during the Kádár system -, she is not only regarded by MSZP as one of their own people, but also as such by SZDSZ. Simor does not completely trust any of them so he therefore created a five-member management committee to replace the former MNB board. In order to protect his presidential majority in this committee, Simor relies on managing director György Sándor and Zsuzsanna Csentericsné Arnold, the head of the central bank's personnel department, both of whom are self-professed conservatives, as opposed to the two deputy-governors.

Inconsistent statements

In peaceful times András Simor could have cruised along without stirring the waters much, but the times of crisis and the plummeting exchange rate of the Forint brought his mistakes to the surface, according to our sources. At present it cannot be predicted how far the Forint will sink or rise in relation to the Euro in the short term. Analysts equally envision an exchange rate of 330 and 276, and are quite capable of explaining all the versions. In the long term, the course of the Forint will be determined by macroeconomic processes, thus governmental reforms could represent significant help for the Forint. Simor is therefore right when he emphasises that the central bank's monetary policies are not able to treat the structural weaknesses of the economy. The tools at its disposal are only sufficient to offset the effects in the short term, but they cannot set the exchange rate on a lasting different course prescribed for it by the economic environment. And these do not depend upon the central bank, which is just a small player in the currency market, since from 26 February the Forint's plus/minus 15 percent intervention band was discontinued, thus it is allowed to freely fluctuate in accordance with the laws of supply and demand.

However, many regard the abandonment of the band as a bad decision since it has made speculators think that the central bank has no exchange rate objective. The international crisis has created an especially dangerous situation since the "hot" capital makes a beeline for the - as Simor put it - "weak, sick antelope", which - if separated from the herd - can become a victim to predatory animals. Our sources reproach Simor for acting too half-heartedly during the government's negotiations with the International Monetary Fund last autumn - the result of which was the 20-billion-Forint credit limit. He also remained silent when some weeks ago it transpired that this year's budget is not worth a tuppenny damn, and he has offered no solution to either the budget deficit or how to tackle state debt.

However, when he did finally open his mouth, he made things worse. At the beginning of January he stated to Reuters that even with a weaker Forint exchange rate the target of 3-percent inflation was still tenable. This resulted in the Euro shooting up from 264 forints to 276 within the space of three days. The statement prompted many investors to speculate against the Forint since in their interpretation MNB would be compliant and not intervene. Since then, in some circles it is believed that, fearing deflation, the central bank manipulated the market to allow the Forint to weaken, but miscalculated and created a far more volatile oscillation in the Forint's exchange rate than it had anticipated.

During this period, the remaining trust in the Hungarian government evaporated: investors began selling off their government bonds one by one using the Forints they received in exchange to buy Euros, which also further weakened the Hungarian currency's exchange rate. The strong decline in credit, both private and corporate, taken out in foreign currencies had the same effect, since in the case of foreign currency-based loans banks buy foreign currencies, exchanging them into Forints and forwarding credit to consumers, thus strengthening the Forint.

(It is thanks to the large-scale granting of foreign currency credit that the Forint was so strong for years, although this was not justified by the state of the economy). However, these days loan repayment has come into prominence, which also weakens the Hungarian currency.

Putting out a fire with a water pistol

The January interest rate cut gave rise to further criticism, since it was not justified by the developments in the government bond market. Then, in February, the Forint's ordeal continued when the price of a Euro rose to levels of 290 and then 310. According to former central bank governor György Surányi, (see picture), whose name also came up as a possible successor to the prime minister, Simor poured petrol on the fire when he stated that the Forint was weak because the Hungarian economy was weak. This contradicted the subsequent Polish, Romanian, Czech and Hungarian joint statement according to which the movement of the exchange rate in the Eastern European currencies does not reflect economic fundamentals. At the beginning of March, the Forint sank to an historic low against the Euro, while on 6 March the subscription of securities in the interbank market reached a peak of 317. Returning from his skiing trip, András Simor convened an extraordinary monetary consultancy sitting for 6 and 8 March, the result of which was that the body stated that it was prepared to apply the full arsenal of monetary policy in order to stop the Forint from weakening.

Of course, the means that can be deployed are limited: the central bank is able to launch a verbal tirade directed at the market players in order to strengthen the forint (this has already been made in an announcement), it can also sell Euros from its foreign currency reserves in exchange for Forints, and it can raise interest rates. The Hungarian currency gained ground after the central bank's statement and since then - up until our magazine went to press - the Forint exchange rate against the Euro has fluctuated between 295 and 308. The question arises whether or not this verbal intervention was enough, or if the central bank intervened with other methods. It probably exchanged Euros on the market to create a demand for the Forint and this is the reason why the Forint exhange rate for the Euro dropped to below 300 in the last two to three weeks. The amount can't have been too big since there is now no wild speculation and Hungarian interbank activity in the currency market is small: a bigger transaction of over 20 million Euros would itself be capable of moving the quotations. It is quite imaginable that MNB made an attempt at intervention with small, targeted sums since in this way it could maintain the exchange rate relatively cheaply, meaning with a sum around 100-200 Euros.

However, there are also dangers inherent in this: if speculators realise that the central bank is active in the market, the attack on the Forint could ensue with large sums. The Euro reserves are not unlimited and the exchange rate cannot be afforded unlimited protection from further weakening. At the end of February, MNB's foreign currency reserves stood at 24.9 billion Euros. If the two new credit installments of 2 and 2.5 billion Euros arrive from the EU and the IMF at the end of March, the reserves could reach the level of 30 billion Euros. Another factor that could also represent support for the Hungarian currency is the central bank's statement that it will convert the 2.5 billion in Euro support that arrives from the EU this year into Forints on the foreign currency market.

Intervention in the foreign currency market can only serve as a temporary solution, since within a few days the market will soak up the sold Euros. If interest levels are not appropriate, the weakening trend will kick in again after market intervention and using up currency reserves could actually bring state bankruptcy dangerously close. Furthermore, the IMF would hardly appreciate it if its money found its way into speculators' pockets via the central bank, thus raising interest rates remains as a final option. The touble with this though, is that interest rate levels are already at an unparalleled high - 9.5 percent when our magazine went to print - but it does not make investment in the Forint more attractive for foreign capital financing state debt. All in all, in the case of considerable devaluation, the central bank does not have the capacity to arrest the trend. This is as if the central bank were trying to put out a fire with a water pistol, as a Buda-Cash expert characterised the situation. Further attempts to obstruct the weakening of the Forint are already the responsibility of the new government, and with good economic policies the 290-300 Forint/Euro level could yet be maintained. Simor's latest statements are already too late, but he is now placing emphasis on safeguarding financial stability. The market is biding its time: the question remains when the market players will eventually start testing the central bank's patience threshhold in response to its contradictory communication.

Mistakes attributable to Simor:

» he remained SILENT from October to March in regard to the state of the budget and the feasibility of the IMF programme;

» he does not communicate well, he does not rely on his staff enough;

» he appointed Gábor Oblath to the Congressional Budget Office instead of György Szapáry and László Csaba. By appointing the latter two men he could have extended a gesture to the conservatives.

» he does not cultivate good relations with the opposition parties.

Which way is the wind blowing?

A lot of gossip saw the light of day about the background of the attacks against András Simor.  The starting point of which was the fact that the MNB governor has a company in Cyprus, but on one point they all tally: all of them identify the source of the news published in Népszava as being the central bank. According to one version, András Simor instigated the attacks against himself. By remaining silent during recent months, the governor of the central bank, who is officially neutral, has allied himself with the government, since he may well have known months ago that there would be problems with the IMF programme. It has not solved the short-term deficit in the state budget nor has it ensured the state debt remains sustainable in the medium term. Moreover, the budget, which the central bank earlier nodded its approval to, is on the edge of collapse. Since Simor moved drastically to the left, he is now trying to return to the centre with this action, according to some. According to another more credible version of events, the attacks stem from the circle of one of the deputy-governors: if it turns out that the IMF programme does not meet expectations, it will be appropriate for Simor to resign. In this case a golden opportunity would open up for one of the deputy-governors.