Bloomberg News

Hungary’s ‘Outlandish’ Policies Threaten IMF Deal, Eurasia Says

July 12, 2012

Hungarian government measures to address the country’s deteriorating economy and the Cabinet’s slumping popularity result in a “diminishing” likelihood of an international bailout agreement, Eurasia Group said.

“Despite the imminent start of talks, the government remains comfortable pushing an outlandish and unconventional policy agenda, contradicting both the substance and the spirit of the negotiations they are about to enter into,” Mujtaba Rahman, analyst at Eurasia Group in London said in an e-mailed note today.

Hungary will start aid talks with the International Monetary Fund and the European Union on July 17 after legislators in Budapest amended a central-bank law that blocked negotiations for seven months. Prime Minister Viktor Orban asked for aid in November as the country’s credit grade was cut to junk and the forint fell to a record against the euro.

The extension of a proposed financial-transaction tax to the central bank and plans to cut labor-related levies in 2013, which threaten the budget outlook, “exacerbate the ongoing trust deficit that exists between the government and its potential creditors,” Rahman wrote.

The central bank being subjected to the transaction tax renewed the clash between the government and the Magyar Nemzeti Bank. The plan is “illegal” because it infringes on central- bank independence and the tax only generates temporary revenue for the budget, Governor Andras Simor said on July 2.

The forint has advanced 9.3 percent against the euro this year on optimism Hungary will sign a deal, recovering from a 15 percent slump in the second half of 2011, the biggest among global currencies.

International lenders will probably request changes including in the financial-transaction tax, the 2013 budget, property and wealth levies, as well as the personal income taxes, Rahman said. Orban’s ability to meet the conditions of an agreement will be “severely constrained” by the 2014 elections as the government’s popularity falls, according to the note.

“This means the government does not really want a deal unless there is little or no chance of surviving financially without it,” Rahman wrote.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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