Hungary balks at more cuts

Hungary is testing the International Monetary Fund (IMF) and the European Union after the government balked at demands from the lenders for even tougher austerity measures, while the markets have reacted in a punishing manner since the July 17 meeting.

The two organizations want the government to make even more drastic cuts in an effort to rein in its public debt, one of the highest in Europe. Without the deal, the EU and IMF will not release the 5.5 billion euros ($7 billion/140.1 billion Kč) in remaining funds from a loan deal struck in 2008 when the country was on the verge of bankruptcy. Hungary currently has a public debt that is 80 percent of its GDP.

Since the failed talks, the markets reacted swiftly, and "anything that is Hungarian is now being sold on the financial market," said Markéta Šichtařová, analyst at Next Finance.

The Hungarian forint dropped 2.6 percent to 290 forints to the euro July 19, the lowest level in the past year.

The Czech Republic and Poland have also been hit as a result, with both currencies dropping initially, but recovery came just as quickly, and the crown is unlikely to see any real damage, Šichtařová added.

"Nearby countries are also under pressure thanks to their Hungarian neighbor, but they have so far stood their ground somehow," she said. "We might rather talk about the 'nonstrengthening' of the neighboring currencies."

Greece, Italy and Spain still pose a much bigger risk to the Czech Republic and Europe as a whole than Hungary, Šichtařová added.

"Although the situation has been exacerbated and the Hungarian unwillingness to start saving sheds a bad light on the whole region, we still think if Europe falls victim to a new financial crisis over the next 24 months, Hungary will not be at the center of it," she said.

Without a deal, the markets may sour as investors view the government as unpredictable.

After winning elections in April, Prime Minister Viktor Orbán said Hungary would not accept "dictates" from the IMF and EU, as they are "not our bosses," Reuters reported.

Orbán's populist government says further budget cuts will be too detrimental to the country's economy and growth prospects. The country's GDP is expected to grow 0.6 percent this year after a rough 6.2 percent contraction in 2009.

"We've been through more than four years of austerity, and that's why we've lost our competitiveness," said Hungarian Economic Minister Gyorgy Matolcsy in a television interview July 19. "We told our partners that further austerity packages were out of the question."

Claire Compton can be reached at
ccompton@praguepost.com