Bloomberg News

Hungary May Seek as Much as $26 Billion From IMF, Varga Says

December 14, 2011

(Updates with Varga quotes starting in third paragraph, credit rating in fourth, forint in fifth.)

Dec. 13 (Bloomberg) -- Hungary may seek financial help of as much as 20 billion euros ($26.4 billion) from the International Monetary Fund and the European Union, said Mihaly Varga, Prime Minister Viktor Orban’s chief of staff.

The value may be between 15 billion euros and 20 billion euros and its duration may be between 3 years and 4 years, Varga told the website Origo in an interview published today. An agreement may be reached by the end of January, he said.

“Since we would only use this in an emergency and therefore it doesn’t increase the debt level, we can talk about a higher amount” than previously discussed, Varga said, according to the interview’s transcript. “Based on our debt- repayment schedule, a three- to four-year duration and 15 to 20 billion euros is possible.”

Orban, who was elected with a two-third parliamentary majority last year, reversed a policy of shunning international aid after the forint fell to its weakest on record against the euro last month and the government struggled to raise planned amounts at debt auctions. The country lost its investment grade at Moody’s Investors Service in November after 15 years.

The forint rose 0.5 percent to 305.02 per euro at 11:07 a.m. today, rebounding from a two-week low. The Hungarian currency has been the worst-performing in the world in the second half of this year, losing 13 percent against the euro.

2008 Bailout

A 20 billion-euro package would match the size of Hungary’s 2008 bailout that the previous government obtained after the global financial crisis engulfed the country. Hungary was the first EU member to resort to an IMF-led bailout during the crisis.

The government has repaid 2 billion euros from that loan at the end of November, Varga said. The next “serious” installment comes due at the end of March, when 960 million euros have to be repaid, he said.

After Orban came to power in 2010, he rejected IMF funds, citing a need to implement “unorthodox” policies, which included the effective nationalization of $13 billion in mandatory private pension funds and special taxes on the energy, financial, retail and telecommunication industries.

Industry Taxes

The industry taxes are planned until the end of 2012 and the government shouldn’t extend them to protect economic growth, which is expected to slow to 0.5 percent next year, Varga said.

Extending the taxes would “worsen our growth outlook further,” and “even 0.5 percent growth would be rendered unrealistic,” Varga said.

Hungary and the IMF have “slightly” disagreed on the extraordinary tax on commercial banks, the government forcing lenders to swallow exchange rate losses on foreign currency mortgages and the 2012 budget deficit, Varga said. The Washington-based lender agreed with the main thrust of Hungary’s “fiscal steps,” he said.

“The most important steps of the Hungarian government are in line with the IMF’s policy recommendations,” Varga said. “That’s why I don’t think it will be too difficult to come to an agreement.”

The government needs to agree with the IMF, commercial banks and the central bank, Varga said. An IMF agreement is needed to obtain a “safety net” for the country, while a deal with commercial banks is needed to ensure they continue to finance the economy.

Central Bank ‘Compromise’

The Cabinet also needs to “compromise” with the central bank to ensure that fiscal and monetary policy “don’t permanently diverge,” Varga said. The central bank raised the benchmark interest rate in November to 6.5 percent, the EU’s highest, from 6 percent, to protect the forint after the country’s sovereign credit rating was cut to junk.

“The central bank and, to a lesser extent, the government need to make gestures and need to strive for a compromise which provides incentives for monetary policy to help the government’s growth plans,” Varga said.

--Editors: Balazs Penz, Alan Crawford

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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