Currency Plunge Prompts Hungary to Rethink View on Joining Euro

(Bloomberg) -- Hungary may seek to join the euro’s ERM-2 waiting room this year or next, its finance minister said, as officials scramble to find ways to arrest the plunging currency as it wreaks havoc across the economy.

Finance Minister Mihaly Varga said the government could consider trying to join the exchange-rate mechanism, which locks a country’s currency into a fixed range against the euro before adopting the single currency, if and when it manages to reach a potential year-end deal to unblock European Union funding.

While Varga said Hungary wouldn’t necessarily adopt the euro any time soon, even talk of taking steps toward doing so marks a sea-change in Prime Minister Viktor Orban’s administration. Orban and his allies have repeatedly floated reviewing the country’s membership in the EU due to its frequent conflicts over graft concerns and the rule of law.

“ERM-2 is something any sane person thinking about fiscal or monetary policy must consider,” Varga told journalists on Tuesday in Budapest. He added that accession isn’t currently on the government’s agenda and “wasn’t timely” right now.

For any country to join the ERM-2, it must win the approval of euro-area finance ministers, the European Central Bank and the ministers and central banks of the non-euro states that are participating in the ERM-2.

Joining the ERM-2 may make Hungary more competitive, given its exposure to the euro area, Varga said. He said the government was examining the conditions Croatia undertook to join ERM-2 before its planned euro adoption next year.

Varga’s comments follow a plunge in the forint to a record on Tuesday, extending its loss to more than 13% this year -- the third-worst performance in emerging markets after the Argentine peso and the Turkish lira.

It has also put pressure on the central bank by fueling already high inflation. While the central bank said last month that it had ended a monetary-tightening campaign that has brought the key interest rate to 13% -- by far the highest in the EU -- consumer prices spiked to a 26-year high of 20% in September.

The government is also battling deepening twin deficits as energy import costs soar, though Varga said shoring up the budget was a priority. He said the fiscal deficit this year may come in at 4.9% of gross domestic product, lower than a recent revision up to 6.1% due to additional gas purchases.

Hungary plans to primarily finance its shortfall from the domestic market. Conditions are currently “not right” for a major foreign-currency issuance, as the dollar’s strength and rising global interest rates are making such debt too expensive, Varga said. Local currency government bond yields now exceed 10%.

He added that the government has no problem paying for foreign-currency maturities this year and in 2023, making an International Monetary Fund loan unnecessary.

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