Bloomberg News

Hungary May Delay Public-Debt Reduction Rule Till ’16 Budget

December 07, 2011

(Updates with government comment in fifth and sixth paragraphs, forint in last.)

Dec. 5 (Bloomberg) -- Hungary may delay until 2016 a constitutional rule passed in April that forces the government to keep cutting public debt, according to a bill proposed by Economy Minister Gyorgy Matolcsy.

The constitution adopted this year requires the government to lower debt until it reaches 50 percent of gross domestic product, with the Fiscal Council in charge of implementation. Hungary was the European Union’s most-indebted eastern member last year, with public debt at 81 percent of economic output.

“According to the transitional rule, the debt-reduction rule would be first applied when making the budget for 2016,” Matolcsy’s draft financial-stability law, dated yesterday and posted on parliament’s website, states.

In the “transitional” period, the budget deficit must be planned according to the country’s euro convergence program published in the spring of 2011, according to the draft.

The convergence program poses stricter budget limits “on the whole” than the draft law on financial stability, the government said in a statement.

“The Cabinet is committed to the gradual reduction of state debt and to keeping the budget deficit below 3 percent” of GDP, it added.

Matolcsy has based next year’s budget on the expectation that economic output will expand 1.5 percent. The government sees growth at between 0.5 percent and 1 percent, the minister said Nov. 25.

‘Too Optimistic’

“The biggest problem is that the government is too optimistic regarding growth,” Matyas Kovacs, a economist at Raiffeisen Bank International AG in Budapest, said in a telephone interview, adding that his bank expects Hungary’s economy to contract 2 percent in 2012.

Hungary reversed more than a year of shunning aid to seek assistance from the International Monetary Fund last month after the forint fell to a record low against the euro. Moody’s Investors Service cut Hungary’s credit rating to junk level later in the month.

The proposal to delay the implementation of the debt- cutting rule won’t surprise markets as much as the turnaround on IMF policy did, Kovacs said.

The government’s “credibility is already at a rather low level,” he said.

The forint advanced 1.5 percent to 299.17 per euro by 3:51 p.m. in Budapest, paring losses in the second half of 2011 to 11.1 percent, the biggest slide worldwide among currencies tracked by Bloomberg.

--Editors: Balazs Penz, Andrew Langley

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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