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Tags: Hungary | IMF | deal | Renewed

Hungary’s Premier Hints IMF Deal Won’t Be Renewed

Thursday, 22 July 2010 01:30 PM EDT

Hungary's prime minister signaled on Thursday that he would not renew a safety net with the IMF and would row back on a commitment to cut the budget deficit to European Union-prescribed levels next year.

The comments from Viktor Orban, who took power in May with the largest majority in Hungary's post-communist history, were the latest in a string of statements that have stunned markets and confounded a Europe-wide push toward spending cuts.

Orban, who has shunned outside economic advice in favor of a domestic-focused agenda, has pledged to end the belt-tightening pursued by the previous Socialist government. His eye appears to be clearly on October 3 municipal elections, where he can consolidate his party's grip on Hungarian politics.

Analysts said his center-right Fidesz cabinet's rejection of more austerity measures in favor of a "pro-growth" policy comprising a tax on banks and possibly other businesses might be softened after the municipal vote.

But Orban has spurned warnings that Hungary could face market pressure and currency weakness without support from its lenders, and said the 20 billion euro ($25.5 billion) EU and International Monetary Fund aid deal would expire in October.

He said Hungary would meet its budget target under the agreement but the issue of a new safety net was "insignificant" in light of much more important negotiations with the EU about how Hungary would bring its budget deficit below 3 percent.

And, in a move that could indicate a significant delay in budget consolidation, he called for all EU states to have the same time frame to reach the bloc's prescribed 3 percent of gross domestic product budget gap level.

Some members may not achieve it until at least 2014.

"We will have a single demand, namely that of equal treatment, that is, the same time frame must be set for all to meet the EU's expectation," Orban said.

The EU and IMF suspended talks over the bailout package on Saturday after Fidesz refused to abandon the bank tax, which the Fund says will squeeze lending and hamper growth. It had called for deeper structural reforms.

Under Hungary's convergence plan submitted to the EU, it agreed to cut its budget deficit to 3 percent by 2011 from a target of 3.8 percent this year.

The IMF said on Thursday it was ready to resume negotiations with Hungary.

Calling for "terms the Hungarian people deserve" and for the country of 10 million to "restore (its) lost economic sovereignty," Orban presented a bill to parliament that aims to glean 200 billion forints ($892.4 million) from a tax on banks both this year and in 2011.

Emboldened by his election victory and austerity fatigue among voters, Orban has shown little of the contrition expressed by leaders in economically troubled Romania, Latvia, and other formerly communist EU states worst hit by the global crisis.

His approach has spooked investors already rattled by problems in the euro zone periphery and the threat of a double-dip recovery, although Thursday's reaction was mixed.

The forint, which plunged more than 3 percent on Monday to around 292 versus the euro -- levels last seen in May 2009 -- had climbed back to 283.80 by 1414 GMT on Thursday.

The Finance Ministry sold all the bills it had put on offer at a 12-month Treasury bill auction, but yields rose, indicating that markets remained skittish.

Hungary is in no danger of default and has managed to put its finances back in order since first having to grab the EU/IMF lifeline in 2008.

And Orban said that, with one of the EU's lowest budget deficits, Hungary could hit the 3 percent of GDP budget deficit level easier than other EU states, which would strengthen Budapest's credibility in markets.

Analysts, however, have said Orban's conflicting messages to domestic and international audiences had bruised his credibility and that investors were hoping his approach was part of his pre-election campaign.

"At the moment, the market is buying into the idea that he is posturing, given domestic political pressure," said Imran Ahmed, emerging FX strategist at RBS.

"The hope is that ultimately... he's fully aware of how dependent Hungary is on external market support... If the IMF and Hungary can't reach an agreement and we still continue to get this uncertainty, markets could get quite brutal."

Hungarian media said Fidesz could also enact a special tax on telecoms and power firms. Economists say that could possibly put the 2010 budget goal in reach but could hinder growth, undermine job creation and postpone vital structural reforms.

They also say that the bold approach to Brussels could also backfire, as the EU would not enter new aid talks without the IMF and it could also slap Fidesz with sanctions for policies such as undermining the independence of its central bank.

"The risks to Hungary are great if global risk sentiment turns," said Nomura strategist Peter Attard Montalto.

© 2023 Thomson/Reuters. All rights reserved.

Hungary's prime minister signaled on Thursday that he would not renew a safety net with the IMF and would row back on a commitment to cut the budget deficit to European Union-prescribed levels next year. The comments from Viktor Orban, who took power in May with the...
Thursday, 22 July 2010 01:30 PM
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