Bloomberg News

Hungary Starts IMF Talks as Economists Predict Delay

July 17, 2012

Hungarian Prime Minister Viktor Orban

Viktor Orban, Hungary's prime minister. Photographer: Akos Stiller/Bloomberg

Hungary will probably miss its goal of obtaining an International Monetary Fund loan by the end of October as Prime Minister Viktor Orban gears up for a re- election bid in 2014, according to a survey of economists.

Talks which started today in Budapest will yield an agreement after October, according to eight of 12 economists surveyed by Bloomberg News yesterday. Four expect a deal in October, six by the end of the year and two in 2013.

IMF and EU officials will focus on untangling policies that contributed to an economic contraction in the first quarter and the downgrade of Hungary’s credit to junk last year. While the forint has gained this year on optimism the country would reach a bailout agreement, that may weaken Orban’s resolve to reach a loan agreement as he seeks to regain investor confidence, boost growth and reduce financing costs without shedding more support halfway through his four-year term.

“Orban is more concerned about domestic politics than investors,” Juri Kren, a London-based economist with IdeaGlobal, said in a phone interview. “Given that the popularity of his Fidesz party has decreased and bearing in mind elections are approaching, unless market conditions deteriorate significantly and force him to sign a deal quickly, I don’t think it will happen before December.”

Forint Effect

The forint gained 9.7 percent against the euro this year and traded at 287.15 per euro at 12:21 p.m. in Budapest compared with 287.86 yesterday. The currency fell 15 percent in the second half of 2011, the most in the world, after the nationalization of private pension funds, the levy of extraordinary corporate taxes and the forcing of banks to take exchange-rate losses on mortgage loans.

The government has said it may obtain a 15 billion-euro ($18.3 billion) loan by the end of October to reduce financing costs. Ten-year government bond yields exceeded 10 percent in January before falling to 7.32 percent today, the lowest in 10 months. Hungary raised an offer of three-month Treasury bills today after traders demanded the most debt in 11 months.

Orban, Hungary’s most powerful premier since the end of communism after winning a two-thirds parliamentary majority in 2010, rejected IMF support after assuming power, saying his economic policies would ensure debt financing. Orban asked for IMF help in November as the government struggled to sell debt and the forint fell to a record.

‘Breathe Easier’

“The IMF is not our enemy,” Orban told reporters in Budapest yesterday. “It would good if the country could breathe easier and we need lower interest-rate loans for that and the IMF can help with this.”

Orban used what the government described as “unorthodox” economic policy over the past two years in part to finance a flat personal-income tax. Measures including a special tax on banks hurt lending and contributed to the economy sliding toward the second recession in four years.

The government won’t withdraw a plan to implement a 300 billion-forint cut in payroll taxes even in the face of potential “huge pressure” from international lenders, Orban said in Budapest today.

The flat tax and allowing mortgage holders to repay loans early at a discounted exchange rate favored the upper-middle class and Orban wants to avoid losing their support in upcoming IMF negotiations, according to Attila Antal, a lecturer at Eotvos Lorand University’s Institute of Political Science in Budapest.

Orban’s Support

Support for Orban’s Fidesz party dropped to 18 percent among eligible voters in a June 14-20 poll, from almost 50 percent in November 2010, according to results posted on the polling company Tarki’s website. Fidesz still leads the biggest opposition party, the Socialist Party, which had 14 percent backing last month. No margin of error was given.

Orban, who has rejected imposing a property tax or a wealth tax, said yesterday that the country shouldn’t return to austerity policies. The government has also defended the flat tax and a new financial-transaction tax, to be introduced in January, which the central bank has said is illegal because it seeks to extend the levy on the independent Magyar Nemzeti Bank.

“Orban must calculate whether he thinks he can win more votes on continuing with his populist agenda or by gaining economic credibility,” Antal said in a phone interview.

December Breakdown

IMF and EU officials left the country in December after initial contacts following the government’s insistence on a central bank law the lenders said threatened monetary-policy independence. The Cabinet this month amended the law to open the way for bailout talks.

Talks between the government, Thanos Arvanitis and Iryna Ivaschenko from the IMF and Barbara Kauffmann from the European Commission started today at the Justice Ministry in Budapest, state-run news service MTI reported.

Orban needs an IMF loan to help his re-election, Raffaella Tenconi and Mai Doan, London-based economists at Bank of America (BAC:US) Corp., said in a report yesterday, adding that the biggest obstacle to an agreement relate to Orban’s stimulus plan.

The Cabinet wants to fund the a 300 billion-forint ($1.3 billion) payroll-tax cut, announced on June 28, partly by introducing a financial transaction levy on commercial banks, the central bank and the state treasury from 2013. Mihaly Varga, Hungary’s chief aid negotiator, has said he expects the IMF to bring up the transaction tax during loan talks. Citigroup Inc. (C:US) on June 29 said the tax relies partly on “fictive” revenue.

“We see this as the last window of opportunity for Prime Minister Orban to strengthen the economy and improve his odds of re-election in 2014, provided the loan negotiations are sealed before the end of the summer,” Tenconi and Doan said. “Protracted negotiations or a sudden stall will only eventually lead to meaningful default risk in 2013-2014.”

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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