[Richard Quest:] It is a shot across the bow as the EU threatens Hungary over its new Cardinal Laws. President Obama says we want more jobs at home than abroad. We`ll talk to a chief exec meeting the president. And they`re getting thinner and faster. The latest gadgets are in Las Vegas. I`m Richard Quest. I mean business. Good evening. Europe`s patience with Hungary is wearing thin. The European Commission today said Hungary`s new Cardinal Laws could violate EU rules. And the Commission said in a swinging attack, "We reserve the right to take any steps that deems appropriate." That`s political speak for taking legal action in the European courts. The Commission`s concerned that the new measures compromise the independence of Hungary`s judiciary, its Central Bank, and its data protection authority. Hungary`s budget arrangements also drew fire. The Commission`s ruled Hungary has not done enough to correct its excessive deficit. It says Hungary`s relying on unsustainable one-off measures to mask it. The budget sustainability progress is in sufficient. Meanwhile, the other side of the view, Hungary`s economy ministry says the deficit will be under the EU`s three percent threshold this year. Two sides of the argument, both political and economic. Let`s talk more about this. Viktor Szabo is an investment manager for Aberdeen Asset Management, formerly head of Market Analysis for the National Bank of Hungary. Viktor, we need you
[Viktor Szabo, Investment Manager, Aberdeen Asset Management:] Good evening.
[Quest:] to analyze this for us. Let`s start with the economic situation, then we`ll come to the what`s happened today. How bad, actually, is the economic situation in Hungary?
[Szabo:] The economic situation is pretty bad. Actually, the government had two big objectives. One of them is to reduce the overall debt, and the second one to boost growth. We can see, now, that none of them worked.
[Quest:] But you say that, but as I just outlined there, they say that the deficit will be under three percent soon. That`s mastered debt.
[Szabo:] Formally, it is. But the committee looks behind the numbers, and the underlying deficit is much higher. So, Hungary is under excessive deficit procedures since 2004, and in last region, the Commission asked Hungary to reduce their structural deficit by half a percentage point. And, in fact, the last two years, the underlying deficit increased by three percentage points.
[Quest:] Right. But then you take the debt to GDP, it`s only 80 percent. Britain`s got a higher debt to GDP than that. So has Italy, and we`re not suing them.
[Szabo:] Yes, definitely, but those countries are big, they have huge savings, strong economy. Hungary`s a small, open economy, no savings, relying on foreign investment. They cannot do that.
[Quest:] So, when the government says it`s all just a big bunch of criticism from external markets you`ve head the arguments, it`s all a plot, basically what do you say to the government or to the officials?
[Szabo:] The hard data tells a different story, because the deficit is larger than it should be. Well, formally, it is in line, but basically, all the underlying indicators are showing that there is no improvement on the fiscal side. The debt level is higher than it used to be before this government, so basically and in the meantime, they spent almost 10 percent of the GDP on nationalized the private pension funds to 10 percent of the GDP, and it`s gone.
[Quest:] OK, now let`s talk about the political side, as much as you`re able to in your
[Szabo:] I`ll try to.
[Quest:] in your role. So, it does look as if we`re heading to a situation where the Commission is basically, from what you read on this paper, it`s telegraphing it`s going to sue them eventually. It`ll take legal action.
[Szabo:] Actually, I think that`s not exactly what the Commission would like to achieve. They would like Hungary to make the changes before the whole legal procedure starts, because it is a long and nasty legal procedure. So, it will give Hungary some time, not much, a little time to modify the laws on the question.
[Quest:] Right. And the and what we`re talking about, here, is the Central Bank rule, the fiscal rule, the appointment of judges and prosecutors, and a media law, aren`t we?
[Szabo:] So far, yes, these are the issues. There are other issues, but legally, it`s quite difficult to attack them. These are the points where the Commission is sure that they have legally, they can sue Hungary and have a positive outcome.
[Quest:] Let`s go back to the financial side, finally, Viktor. A very senior banker said to me last week that basically no one in the city in the financial world has much confidence in Hungary at the moment. Was he being exaggerating and just being too much, too much fume?
[Szabo:] No, just look what the price is. The high-risk premium that the markets are now pricing, they clearly show there is a lack of confidence on the market, and that more problem is that confidence is waning in Hungary, as well. So, people now are starting to take money out of the bank and converting it to foreign currency. And so many people open accounts abroad.
[Quest:] Is it beyond the possibility that Hungary goes bankrupt?
[Szabo:] It`s not beyond possibility, but it`s not our baseline scenario. At the end of the day, they will have to surrender and accept the all the conditions of the IMF and the European Union. No other way.
[Quest:] We`ll talk more about. Many thanks, indeed, for coming in
[Szabo:] Thank you.
[Quest:] and talking about this. Staying in Europe, Mario Monti says Europe no longer has to worry about contagion from Italy. The Italian prime minister met with Angela Merkel in Berlin. The German chancellor praised Italy`s austerity measures, which she says will help stabilize Europe.
[Angela Merkel, Chancellor Of Germany:] Both in terms of the speed and the substance of these measures, I believe they will strengthen Italy and will improve its economic perspective. We have followed with great respect how quickly the measures are being implemented.
[Quest:] Now, Prime Minister Monit`s imposing $40 billion of austerity. He said the cutbacks aren`t just to please Europe, they`re in his country`s best interests, too.
[Mario Monti, Prime Minister Of Italy:] This was a very mature attitude by Italians, and it merits not a reward from Europe, because the measures we adopted were adopted in the interest of the Italian people. But it merits a recognition by Europe that it doesn`t have to fear anymore that Italy is a possible source of contagion for Europe.
[Quest:] It`s amazing what a bit of austerity does to your stock market. The main index was one of the few gainers in Europe. If you take a look at Italy`s numbers, banks led the gains. Banca Popolare di Milano at more than nine percent. The markets in a falling market of the FTSE, DAX, and CAC. The actual MIB in Milan rose a quarter of one percent. Total was down one percent, Shell down three. Germany`s economy is slowing, and that took its toll on that economy. GDP for Q4 down one quart fourth one quarter of one percent. That will teach me to translate that fast. You get the idea, Germany`s slowing down. Out with outsourcing. Let`s have those jobs back in. Barack Obama wants businesses to come home and relive the American dream.