In practice this means that the SZDSZ wants out of the coalition. The most likely scenario appears to be a minority government by the Socialists, but it cannot be excluded either that the political tug of war that seems to be inevitable will lead to Gyurcsány's ousting. Should neither of these scenarios materialise, another option could be early elections.
The move which precipitated the decision was the sacking by Prime Minister Gyurcsány of Health Minister and SZDSZ member Ágnes Horváth earier today (with effect from 30 April), ostensibly for failing to push through an overhaul of the health care industry.
The sacking of Horváth and the recall of SZDSZ ministers from the government are both with effect from 30 April, which means that Hungarian political tensions are set to remain for at least the next 30 days. One option is clearly that the two governing parties join forces and oust Gyurcsány if they believe that this would be a way out of the immediate impasse.
SZDSZ have 20 and the Socialists 190 MPs in the 386-strong Parliament. If the Socialists want to avoid becoming a minority government they need at least four liberals to remain supportive. In another unrelated issue the socialists are in the process of deciding whether to bar Socialist MP József Karsai from the party, if they decide to do this they will need 5 SZDSZ members. The fate of Karsai is being decided even as I write.
It is, of course, just a coincidence but the central bank has today decided to raise Hungarian interest rates by half a percentage point - to 8% - in a move which has to be highly controversial given the very weak state of Hungary's domestic economy, but is in fact essential given the very weak state of the forint, and the dependence of many Hungarian citizens on mortgages and loans which are denominated in Swiss francs.
Symbolically the forint also fell on the news of the political rift, falling to 259.38 per euro by 2:28 p.m. in Budapest from 257.77 late on March 28, and reaching in so doing its lowest level since March 11.
Obviously this seems to be the opening of a crisis which is set to run and run. I have a much fuller consideration of the background to the whole situation in this post here.
I will try and update this post later today when the dust starts to settle, assuming, that is, that it does.
The executive body of Hungary's junior governing coalition member, the Liberal Free Democrats (SZDSZ) decided at a meeting late last night to recall its members from the government, thus confirming the decision taken by the parlimentary faction. At the present time it is not clear what the eventual outcome of this "mini-crisis" will be. At the present time the SZDSZ see their decision to leave the coalition as irrevocable, but they have said they will continue to support the fulfilment of the convergence programme, the reforms and the necessary structural reshuffle from outside the coalition. This would, if adhered to, allow the Socialist MSZP to continue to govern in minority, but it is hard to see how they can realistically hope to adhere to this since it is precisely the reforms which are being implemented which are so unpopular, and thus it is hard to see what they could hope to have gained by leaving the government if they maintain this posture.
On the other hand, Socialist faction leader Ildikó Lendvai has announced that unless the situation changes, the MSZP to go ahead and form a minority government, with Ferenc Gyurcsány remaining the Prime Minister. Lendvai emphasised they were not preparing to replace the PM and that there would be no vote of confidence either.
Gyurcsány meanwhile is signalling that he is willing to stand down if his person is the only obstacle to an agreement between the two parties. But as Portfolio Hungary suggest, his willingness or otherwise to go is hardly the issue here, since what needs to be decided between the two parties is - assuming an agreement between them might be possible - would lead the government. It can be taken for granted that under this scenario it would not be Gyurcsány. The question is, can the two sides reach any sort of agreement at this juncture?
All of this is very hard to evaluate at this point, since undoubtedly a lot of the "positioning" that is taking place forms part and parcel of the underlying theatricality of Hungarian politics.
What is very clear, however, is that the economic backdrop to all this is simply not going to go away, whatever decisions ae eventually taken on the political front. That would seem to be the one fixed point we have here. And since it is the economic backdrop which is producing all the political instability, then it is not unreasonable to imagine that the political instability will also continue.
The decision by the Bank of Hungary to raise interest rates in the face of an economy which is struggle to get any kind of positive growth in 2008 is simply a symptom of the severity of the situation. News today that Hungary's fiscal deficit was 5.5% of GDP last year (rather than the previous estimate of 5.6%) hardly seems big news, yet the forint did manage to strengthen on the back of it, advancing at one point by as much as 1.3 percent to 257.17 per euro, before dropping back to 258.07 by 5:20 p.m. in Budapest, from 260.65 late yesterday.
But equally, maybe what is leading the forint to strengthen at the moment is not the news on the fiscal front, but the continuing rise in the Hungarian yeid curve and the prospect that the now severely weakened Hungarian National Bank (weakened in the sense that it has now shown its willingness to cede to pressure from the markets, although in reality it probably had little alternative) may raise rates even further (or be psuhed into doing so).
Hungary's Government Debt Management Agency (ÁKK) sold HUF 40 bn worh of 3-month discount T-bills at auction this morning, and the average yield was set to 8.83%. That is up 11 basis points from Monday's benchmark fixing and 34 bps higher than at the previous auction of the same instrument. Anyone want to bet we now go from 8% to 8.5%, even as internal demand in Hungary moves down and down?