Bloomberg News

Hungary Says It Wants IMF Talks, Lender Has No Program Request

November 18, 2011

(Updates with IMF reaction in first paragraph, central bank in third, investor comment in fourth, markets in fifth.)

Nov. 17 (Bloomberg) -- Hungary said it started talks with the International Monetary Fund on a backstop that doesn’t include a loan. The Washington-based lender said it hasn’t received a request for negotiations on a Fund-supported program.

The Cabinet is seeking a “new type” of cooperation to bolster investor confidence and protect growth, the Economy Ministry said in an e-mail today. An IMF team is in Budapest conducting a regular Article IV review, which is “not a negotiating mission,” Iryna Ivaschenko, the lender’s representative to Hungary, said in an e-mail. The government spokesman’s office and the ministry declined to give details.

The forint fell to a record on Nov. 14 after Standard & Poor’s threatened to cut the country’s credit rating to junk, saying Prime Minister Viktor Orban’s “unorthodox” policies threatened budget financing in the most indebted country among the European Union’s eastern members. The central bank said yesterday it may have to “gradually” raise interest rates to defend the forint.

“The markets forced this upon the government and it’s a good solution,” Daniel Bebesy, who helps manage $1.5 billion mostly in Hungarian government bonds at Budapest Fund Management, said by phone today before the IMF’s statement. “An IMF deal along with central bank rate increases can together narrow the underperformance of Hungarian assets vis-a-vis regional peers.”

Forint, Bonds, Stocks

The forint, which has been the worst-performing currency in the world against the euro since June 30, rose 1.8 percent to 308.13 per euro at 6:03 p.m. in Budapest, the strongest in a week. The benchmark BUX stock index gained 3.8 percent to 17,370.26, led by refiner Mol Nyrt. and OTP Bank Nyrt., the nation’s largest lender, which both surged 6.4 percent.

Hungary’s benchmark 10-year bonds rallied for the first time this week, cutting the yield 45 basis points, or 0.45 percentage point, to 8.346 percent.

“The mission for the Article IV consultation is not a negotiating mission, but a mission to conduct the regular economic surveillance that the IMF performs for all member countries,” Ivaschenko said. “The IMF has not received a request from the authorities to initiate negotiations on a Fund- supported program.”

2008 IMF Loan

Investors are shunning riskier countries’ bonds as Italy -- with a debt load bigger than that of Spain, Greece, Ireland and Portugal combined -- struggles to ward off contagion from a crisis that started in Greece more than two years ago and threatens to infect weaker economies.

Hungary was the first EU member to obtain an IMF-led bailout in 2008 and had the highest government debt level among the bloc’s eastern members last year at 81 percent of gross domestic product.

Orban rejected renewing the IMF loan after winning elections last year, saying he wanted more freedom to pursue “unorthodox” policies aimed at cutting Hungary’s debt level while trying to meet a campaign pledge to end years of austerity measures.

The steps included raising revenue by effectively nationalizing $14 billion of assets held by private-pension funds, levying extraordinary taxes on the banking, energy, retail and telecommunication industries and forcing banks to swallow exchange-rate losses on foreign-currency mortgages.

‘Turning Point’

The measures aimed partly to plug budget holes resulting from cutting personal and corporate income taxes, which failed to boost growth. The government, which is raising the value- added tax rate, excise taxes and some corporate income taxes from January to narrow the shortfall, has cut its growth outlook to 1.5 percent next year from 3 percent. The European Commission forecasts 0.5 percent growth for 2012.

“Hungary has reached a turning point,” the Economy Ministry said. “This new type of cooperation with the IMF, unlike the old one, increases our monetary and economic independence. This way we will have a chance to stick to our agenda of boosting growth.”

Hungary’s policies, including the dismantling of checks on policies, levying of extraordinary industry taxes and forcing lenders to swallow exchange-rate losses on loans, are harming investment and growth at a time when Europe’s debt crisis is boosting financing risks, S&P said on Nov. 11.

‘New Type’

The ratings company said it may downgrade Hungary to junk this month from the lowest investment grade, which is also the country’s credit grade at Moody’s Investors Service and Fitch Ratings.

The “new type” of IMF agreement Hungary is seeking won’t boost the public debt level, the Economy Ministry said, without offering details. The agreement would need to provide at least 4 billion euros ($5.4 billion), equivalent to Hungary’s external financing need next year, to bolster investor confidence, Simon Quijano-Evans, a London-based strategist at ING Bank, said in an e-mail today.

Hungary’s 20 billion-euro rescue loan obtained in 2008 from the IMF and the EU was a stand-by agreement, the Washington- based lender’s oldest facility in use since its inception in 1952.

The terms of the loan conditions were “streamlined and simplified” in 2009 during the global financial crisis that struck after the collapse of Lehman Brothers Holdings Inc. to make it more “flexible and responsive,” to countries’ needs, according to the IMF’s website.

IMF Options

Another type of assistance, the Flexible Credit Line, is reserved for countries “with very strong fundamentals, policies, and track records of policy implementation,” as it has no conditions and no caps on the size of the credit line, the IMF said on its website. Once a country qualifies, it can begin drawing down the funds as the “very strong track records” of these countries “give confidence that their economic policies will remain strong,” the IMF said.

The latest facility, introduced in August last year, is the Precautionary Credit Line. It is also for “countries with sound fundamentals and policies, and a track record of implementing such policies.” While countries eligible may not meet the criteria of the Flexible Credit Line given some “moderate vulnerabilities,” these don’t require the same “large- scale policy adjustments” as traditional stand-by loans, according to the IMF’s website. This type of loan has fewer conditions than stand-by loans.

Mexico, Colombia and Poland have so-called “flexible credit lines,” with no conditions, while the Republic of Macedonia, which became the first recipient of precautionary credit line in January, unexpectedly tapped the loan in March citing a delayed Eurobond sale.

--With assistance from Andras Gergely in Budapest and Agnes Lovasz in London.Editors: Balazs Penz, Paul Abelsky

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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