Region: Hungary takes on IMF

The Hungarian forint is recovering against the euro, after the currency's steep drop in mid-July following the collapse of talks between the government and International Monetary Fund (IMF) negotiators. 

The forint was up 1.2 percent during trading July 26 amid speculation the government of Prime Minister Viktor Orbán will return to negotiations with the IMF and in the wake of positive results from stress tests on European banks made public July 23. The forint traded at 285.89 to the euro July 26 after falling about 2 percent a week earlier.

Hungary received a $26 billion loan in 2008 from the IMF to avoid defaulting after investors were unwilling to continue buying up the country's debt during the early days of the international financial crisis. Talks between Orbán's government and the IMF and European Union broke up July 17 after he declined to make further spending cuts while urging in a speech that the country take back its "economic sovereignty."

The IMF negotiating team left Budapest July 19.

Hungary has previously met all the interim targets for deficit reduction set by the IMF in 2008, and most of the loan money has already been delivered. The government says it doesn't need any more loans. The current IMF program runs out in October, and negotiations were about extending the program on a precautionary basis. Hungary, unlike most of its neighbors, is in line to meet the Maastricht criteria of an annual budget deficit of no less than 3 percent of GDP next year, and the government insists it will meet the IMF-approved budget deficit target of 3.8 percent this year.

Orbán, the leader of a center-right government, has advocated higher taxes on banks and avoiding further spending cuts. Orbán also says that in the future he will only negotiate with the EU if additional loans are needed, though some analysts think Orbán and the IMF will eventually return to the table. Economic Minister Gyorgy Matolcsy said an IMF delegation will visit Budapest again in September.

"Levels between 280 and 290 still imply that the negotiations will not fail," Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt, told Bloomberg News. "The market expects that there might be a delay, but in the end the government will give up and accept the IMF and EU terms."

In a television interview July 23, Orbán seemed to indicate he had no such plans. Asked whether Hungary needs more IMF loans, Orbán said, "No. The Hungarian economy must be financed from the market."

"For now, it seems there is no need for [a new deal]; we have not used any money from the IMF loan over the past year," he told ATV television. "The Hungarian economy's position is currently good. We have a single weakness, the most painful, and that is low growth."

Orbán's decision is a gamble that investors will feel sufficiently confident in the economy to finance the country's debt through bond sales. Hungary has tapped bond markets twice since April 2009.

In the wake of Orbán's interview, the ratings agency Standard & Poor's said July 23 it was considering classifying the country's debt as "junk." Without IMF aid, the country may "face higher and more volatile funding costs," said the agency, according to Bloomberg.

"If the market were to come to the conclusion that talks could break up totally, we would see rates far above 300" per euro, Karpowitz told Bloomberg. "The upside potential for the forint is very much limited" by uncertainty surrounding Hungary's lending program.

Benjamin Cunningham can be reached at
bcunningham@praguepost.com