http://www.businessweek.com/news/2010-07-18/hungarian-assets-may-fall-after-imf-eu-abandon-negotiations.html July 18 (Bloomberg) -- Hungarian bonds and the currency may fall after the International Monetary Fund and European Union ended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The Washington-based IMF, which is providing the bulk of a 20 billion-euro emergency loan to Hungary under a 2008 bailout agreement, said late yesterday that “a range of issues remain open.” The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said. The statements are a blow to Orban’s efforts to rebuild investor confidence after ruling party officials raised the spectre of a Greek-like crisis last month, driving the forint down 4.6 percent against the euro in two days. Hungary, in its fifth year of austerity measures, sought to persuade creditors to widen the country’s deficit target for next year. “This is definitely negative for bonds and negative for the currency, both in speculative terms and in real flows,” Peter Attard Montalto, an economist at Nomura International Plc in London. “For an IMF statement, it’s pretty damning. This supranational cushion behind Hungary is actually far softer than people realize.” The forint has lost 6.5 percent against the euro in the past three months, the worst performance among the more than 170 currencies tracked by Bloomberg. The yield on the benchmark three-year government bond rose 153 basis points to 6.93 percent on July 16. Landslide Victory Orban won a landslide victory in April by pledging to end the budget cutting strategy of his predecessors, which helped reduce Hungary’s deficit to 3.8 percent of gross domestic product in 2008 from 9.3 percent in 2006. The shortfall widened to 4 percent last year and may reach 4.1 percent this year, according to the European Commission. After the election, Fidesz said the previous administration lied about the budget as he lobbied the IMF and EU to allow wider deficits this year and next. Fidesz officials roiled markets on June 3 and 4, saying the economy was “much worse” than the government had forecast and the country had a “slim chance to avoid a Greek situation.” The government sough to ease concern on June 5 by pledging to stick with this year’s creditor-approved deficit target of 3.8 percent of GDP. The EU, in its July 17 statement, welcomed Hungary’s commitment to the 2010 deficit target and said the country has one of the lowest budget deficits in the 27-member bloc. ‘Tough Decisions’ “However, the correction of the excessive deficit by next year will require tough decisions, notably on spending,” Olli Rehn, commissioner for Economic and Monetary Affairs, said in a statement released from Brussels. “Care will also be needed to ensure a stable environment for both domestic and international investors.” Concluding the review is a condition for disbursing funds from the bailout loan. Hungary has 5.7 billion euros of the package available. The government has refrained from tapping it this year as it was able to finance spending through debt sales. “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,” Christoph Rosenberg, who led the IMF mission, said in a phone interview today. “It makes eminent sense for Hungary to reduce its fiscal deficit, as the country continues to be vulnerable due to its high debt ratio.” During the IMF’s visit, Hungary’s government tried to persuade the fund to accept a deficit target of as much as 3.8 percent of GDP for 2011 instead of 2.8 percent, Economy Minister Gyorgy Matolcsy said in a July 2 interview. Hungary needs the extra room to finance changes, such as merging state agencies at the county level, to yield longer-term savings, he said. ‘Continues to be Vulnerable’ The government also sought a two-year “precautionary” loan agreement for as much as 20 billion euros beginning in 2011, Matolcsy said. “During the talks with the IMF and EU delegations, the Hungarian government openly and honestly revealed the problems stemming from the misguided budget management in the first half,” Matolcsy said in a statement released late yesterday through the MTI news service. “The government will naturally continue negotiations with international organizations, including the IMF and the EU.” Bank Tax Concerns In an effort to persuade investors the government can reach its deficit target, Orban on June 8 announced plans to raise 187 billion forint ($527 million) this year from a new tax on the financial industry. He also said Hungary would cut spending, reduce personal income taxes and lower taxes for small businesses. The planned levy on banks, insurers and financial leasing companies “is likely to adversely affect lending and growth,” the IMF said in its statement. “The statements suggest that the parties didn’t turn hostile,” said Gergely Suppan, an economist at Takarekbank Zrt. In Budapest. “The IMF probably wanted to see the basis of the 2011 budget and the government couldn’t show specifics.” Any negative market reaction may be tampered by the fact that Hungary doesn’t rely on the bailout loan to finance itself and has been able to raise funds on the market, Suppan said. --Editor: Willy Morris To contact the reporter on this story: Balazs Penz in Budapest at bpenz@bloomberg.net. To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net.
Hungarian Assets May Fall After IMF, EU Abandon Negotiations
July 18, 2010, 8:52 AM EDT
Sunday 18 July 2010
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