Bloomberg News

Hungary May Have to Give in to IMF Conditions for Loan

November 24, 2011

(Updates with analyst’s comment in sixth paragraph.)

Nov. 23 (Bloomberg) -- Hungary’s government may have to reverse its position on ruling out International Monetary Fund conditions in exchange for financial aid, according to Barclays Plc, Goldman Sachs Group Inc. and Capital Economics Ltd.

Prime Minister Viktor Orban last week abandoned his policy of shunning the Washington-based lender, seeking help after a Standard & Poor’s threat to downgrade Hungary’s debt to junk sent the forint to a record low. He may have to do another reversal and scrap emergency taxes on some industries and ease the burden of a mortgage-repayment plan on banks, said Neil Shearing, an emerging-markets analyst at Capital Economics.

The government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened. The threat of market turmoil may force Orban to back down from insisting on an IMF agreement that won’t infringe on the country’s “economic sovereignty,” Barclays Capital economist Christian Keller said.

“This seems to create a conflict between what Hungary wants and what is realistically available,” Keller, Barclays’s London-based head of research for emerging Europe, the Middle East and Africa, said yesterday by phone. “They are having serious financing challenges.”

The forint has lost 14 percent against the euro since June 30, the second-worst performance globally. It dropped today on concern investors will shun assets of countries most at risk of contagion from the euro crisis after Germany failed to sell all the bonds it offered at an auction today. The currency fell 1.9 percent to 310.61 per euro as of 4:01 p.m. in Budapest, eroding its gain since the government approached the IMF to 1 percent.

“Until the government wakes up and surrenders some sovereignty to the fund or outside anchors, the forint is not going to turn around,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc, wrote in an e-mail today. The markets “are worried over the lack of a policy anchor.”

IMF ‘Insurance’

The government is seeking IMF “insurance” that will boost the country’s ability to tap markets to finance its debt, Economy Minister Gyorgy Matolcsy told lawmakers in Budapest Nov. 21, adding that he saw “no reason to veer” from its economic policy “as it’s successful.”

Hungary was granted a 20 billion-euro ($27 billion) Stand- By Agreement by the IMF and the European Union in 2008 after Lehman Brothers Holding Inc.’s collapse caused its debt markets to freeze and the forint to tumble. IMF loans of that kind force governments to adopt budget-deficit and debt-reduction targets.

Relations with the lender soured in 2010 when Orban’s government, which took office last May, broke off talks with the country’s creditors, citing disagreements over economic policy during a review of the rescue loan.

The agreement ran out a year ago and repayments will begin in 2012, pushing up financing requirements by almost half from this year. Foreign-currency debt maturing next year will soar to 1.37 trillion forint ($6.4 billion), rising to 1.48 trillion forint in 2013 before peaking at 1.65 trillion forint in 2014 as Hungary repays its IMF-led bailout, the government estimates.

Precautionary Credit Line

Hungary is seeking a “precautionary credit line” of about 4 billion euros ($5.4 billion) from the IMF, the Nepszabadsag newspaper reported Nov. 19 on its website, citing unidentified people close to the government. Orban said last week Hungary won’t accept strings attached to a safety-net loan.

“No one can limit Hungary’s economic sovereignty --that’s the basic tenet of the government’s philosophy,” Orban said in a Nov. 18 radio interview after approaching the IMF.

The Precautionary Credit Line is no longer available after the lender yesterday revamped some of its facilities. It introduced the Precautionary and Liquidity Line, which can be tapped by countries with “strong economies” currently facing short-term liquidity needs.

‘Hard to Say’

“This situation they have gotten themselves into -- essentially telling the fund they don’t need them anymore and then having, what most people would say, made some policy mistakes -- I would think it’s hard to say this is a country with sound policies,” Edwin M. Truman, a former assistant U.S. Treasury secretary who’s now a senior fellow with the Peterson Institute for International Economics in Washington, said in a telephone interview.

A breakdown in IMF talks would trigger a decline in the forint and boost borrowing costs, forcing the central bank into a defensive interest-rate increase and the government back to the IMF negotiating table, Capital Economics’ Shearing said yesterday in a telephone interview.

“It’s difficult to see how this can be reconciled and squared without somebody having to concede,” Shearing said. “I have a sense that the government will back down, but it won’t back down easily, not until it’s boxed into a corner.”

Avert a Downgrade

An IMF agreement may help avert a credit-rating downgrade, the central bank said Nov. 20, joining Fitch Ratings, which said two days earlier that a deal with would reduce pressure on the country’s debt grade.

“Any IMF program would come with strict policy conditionality, thereby reducing independent financial and economic room for maneuver by the government,” Fitch said.

Hungary has a negative outlook on its lowest investment- grade rating at Moody’s Investors Service, Fitch and S&P, which on Nov. 12 said a downgrade to junk may be imminent.

In a Nov. 12 statement, S&P called initiatives by Orban’s government “unpredictable,” citing the dismantling of checks on policies, the levying of extraordinary industry taxes and a program forcing lenders to swallow exchange-rate losses on the early repayment of foreign-currency mortgages.

Those are the policies the IMF would probably request to be changed as conditions for granting a new loan, Shearing said.

‘Scattergun Approach’

“I suspect they are less concerned about the pace of fiscal consolidation and more concerned about the scattergun approach to policy,” Shearing said. “We’ll see a slightly more even approach” under IMF supervision.

Any new deal will have to be of a similar size to the 2008 package to demonstrate credibility to markets, Gillian Edgeworth, a London-based economist at UniCredit SpA, said Nov. 20 by e-mail.

Hungary’s credit-default swaps, which are used to insure bondholders against the risk of non-payment, were among the eight worst performers in the world until the government’s IMF announcement. They have been the third-best performers since then, with five-year contracts at 591 basis points yesterday, compared with 604 the day before the announcement, according to data provider CMA.

“Difficult and volatile financing conditions, which we expect to persist, sustained forint volatility, and the risk of losing market access altogether are likely to force the government to accept another Stand-By Arrangement,” Goldman Sachs economists, including Ahmet Akarli, wrote in a Nov. 20 note. “Should the current market conditions persist, as we currently expect, we do not see other options for the government.”

--With assistance from Sandrine Rastello in Washington and Zoltan Simon in Budapest. Editors: Andrew Langley, Alan Crosby

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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


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