Hungary braces itself for negative market reaction

HUNGARY IS braced for negative market reaction to the decision of the International Monetary Fund (IMF) to suspend talks with the government due to a disagreement over its spending plans.

The IMF froze its review of Hungary’s funding programme over the weekend, leaving it unable to access funds from an existing €20 billion aid package. The move casts doubt on the government’s hopes of securing a standby loan for 2011 and 2012 as it tries to revive the country’s ailing economy.

“Our talks with the Hungarian government have been interrupted as we have not been able to find enough common ground and there remain too many unresolved issues to take this review to our board,” said the head of the IMF mission to Hungary, Christoph Rosenberg. “It makes eminent sense for Hungary to reduce its fiscal deficit, as the country continues to be vulnerable due to its high debt ratio.”

The conservative government of Fidesz party leader Viktor Orban tried in vain to persuade the IMF to accept a higher target budget deficit for 2011, which officials claimed would help them implement major structural reforms that would lead to long-term savings.

“In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced – 3.8 per cent of GDP in 2010 and below 3 per cent of GDP in 2011 – remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” the IMF said.

“Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop.”

The €20 billion bailout from the IMF and EU saved Hungary from financial meltdown in 2008 and helped the previous government continue with reforms that helped dramatically reduce the country’s formerly ballooning deficit.

Fidesz won power on a pledge to ease the austerity measures and take a tougher line in talks with international lenders, fuelling fears that it may allow the deficit to grow in the years ahead.

“Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU,” said Olli Rehn, the EU’s commissioner for economic and monetary affairs. “However, the correction of the excessive deficit by next year will require tough decisions.”

The IMF-led loan provided a safety net for Hungary during the worst of the crisis, and strengthened its position when it went back to the international debt markets to seek funding. That confidence was badly dented last month, when Fidesz officials warned that Hungary could face a “Greece-style” debt crisis, and the IMF’s decision to suspend talks could see the country’s currency, stocks and bonds come under fresh selling pressure.

“This is definitely negative for bonds and negative for the currency, both in speculative terms and in real flows,” said Peter Attard Montalto, an economist at Nomura International in London.