HUNGARY IS resisting pressure from lenders to impose further austerity measures despite sharp falls in the value of its currency and stocks after the International Monetary Fund (IMF) suspended talks on emergency funding.
The forint and the Budapest stock exchange index both fell by more than 2 per cent, bond yields increased by 20-30 basis points and the cost of insuring Hungarian debt against default rose by 47.5 points as markets responded to the impasse between the IMF and the government.
The IMF halted talks with the conservative Fidesz party government due to disagreement over the size of Hungary’s proposed 2011 budget deficit, with the IMF urging tighter spending and ministers requesting more leeway to push through reforms while minimising pain for the public.
Prime minister Viktor Orban also hopes to impose a special tax on banks and other financial institutions to help close the budget deficit, but that was also frowned upon by the IMF and the EU, which gave Hungary a €20 billion bailout in 2008.
Suspension of the IMF funding review means the government will now be unable to access what remains of that loan, potentially damaging investor confidence and raising the spectre of a downgrade by ratings agencies, which would raise the cost of borrowing on the debt markets.
The European Commission said reducing Hungary’s deficit by next year “will require tough decisions, notably on spending”, but economy minister Gyorgy Matolcsy yesterday ruled out another round of austerity measures – which could damage Fidesz’s popularity ahead of local elections in October.
“Hungary has experienced a programme of austerity over the past five years,” he said. “We inherited this from the previous governments and we would like to do away with the unfortunate consequences of these steps.
“We have told our partners that further austerity packages were out of the question,” he said.
Analysts said the government’s position compounded damage done last month, when officials warned that the country might face a “Greece-style” debt crisis. Those comments also caused a sharp sell-off of Hungarian assets.
“The new government has not learned its lessons from the previous gaffe, while the market is in no mood to overlook any fiscal laxity,” said Timothy Ash, head of emerging market research at Royal Bank of Scotland.
“Arguably, continued adherence to the current IMF programme had anchored both markets and Hungary’s [credit] ratings: the fact that Hungary is now going off-piste suggests both may be under threat.”
Hungary’s central bank – which held interest rates at 5.25 per cent yesterday – might have to raise rates if the government fails to act quickly and currency weakness persists, said UBS economist Gyorgy Kovacs. “Financial markets might not grant the government breathing space until the municipal elections in October, and in this case the Hungarian government will have to present measures earlier to soothe investor sentiment,” he said.
