"Risk scenario approaches" in IMF/EU loans story, says City

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The risk scenario of EUR/HUF levels above 300 is now approaching and the Hungarian risk premium has decoupled "once again" from the Eastern European average as no deal on a new IMF/EU financing package is in sight, London-based emerging markets economists said on Monday.

In its Daily Currency Briefing research note released to investors in London, Commerzbank said that "a new chapter in the story of 'Why the IMF and the Hungarian government are unlikely to ever reach an agreement' began on Friday" when Prime Minister Viktor Orbán stressed in a radio interview that the IMF (and the EU) would not be able to dictate any political conditions to Hungary.

Moreover, Orbán "is prepared to face up to a confrontation with the European Court of Justice should the EU's reply to (his) reform proposals as part of the infringement procedures ... turn out to be negative".

Also, the ECB's comments regarding the changes to the controversial central bank legislation last week were "hardly encouraging ... The ECB is still concerned about the sovereignty of its Hungarian sister organisation and clearly does not find that its concerns were appropriately addressed in the proposed changes".

That leaves "a bad taste for the forint" which has lost further ground against the euro, Commerzbank said.

In a separate report released on Monday, Capital Economics, a major London-based financial and economic research group told clients that "attention has focused on reforms (or lack of) to the controversial central bank law, but the sheer scale of Hungary’s fiscal problems may prove to be an equally large stumbling block".

Although Hungary's public finance data showed that "it ran its first budget surplus since the end of communism last year" at 4.2% of GDP, the headline figure is distorted by a number of one-off measures.

Last year's effective nationalisation of Hungary's private pension funds improved the budget position by some 9.7% of GDP – without it, the budget deficit would have stood at 5.5% of GDP, Capital Economics said.

"It is hard to escape the conclusion that personal income tax reform has been a key factor behind Hungary's gaping underlying budget deficit ... (However) with the government staking its reputation on the flat tax system and, more generally, on retaining 'sovereignty' over economic policy, it's not clear how the authorities could accede to EU-IMF demands to bring the public finances on a sustainable footing".

Accordingly, "we continue to believe that the economy will need to be pushed to the brink of a crisis before a deal is reached", London-based analysts at Capital Economics said.

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