EC, IMF suspended talks with Hungarian government
The European Commission postponed the conclusion of the fifth review mission under the European Union balance of payments assistance to Hungary on Saturday, as there were “a number of open questions on which the government would need more time to provide clarification”.
The delegation welcomed the government's commitment to keep the 2010 deficit target of 3.8% of GDP and acknowledged measures taken to correct budget slippages, but it said “corrective measures considered so far fall somewhat short of the required adjustment and are largely of a temporary nature.” The government has to increase its efforts to bring the deficit below 3% of GDP in a sustainable manner in 2011, the Commission said, adding that a planned levy on the financial sector would help meet short-term fiscal commitments, but “in its current form, could have a significantly negative impact on the country's investment climate and economic growth”. The delegation urged the government to review some features of the levy. Referring to the current tension between the government and the National Bank of Hungary (MNB), the mission further urged the government to respect the full independence of the MNB, including its operations.
The delegation acknowledged steps Hungary's new government has taken to raise budget revenue and cut budget spending “in the interest of rectifying earlier mistakes”, National Economy Minister György Matolcsy said in a statement late Saturday. He added that “In the course of negotiations with the IMF and EU delegations, the Hungarian government honestly and openly exposed the serious problems resulting from the unsuccessful fiscal management of the first half.” The government will continue its policy of structural reforms in areas deemed important by its negotiating partners, such as the tax system, health care and public transport, Matolcsy said.
The suspension of talks is bad news for markets because it shows investors the Hungarian government's cooperation with international organizations is not going smoothly, said Takarékbank chief analyst Zoltán Ádám. MKB Bank's chief analyst Zsolt Kondrát said the government had corrected its earlier communications mistakes when it committed to meeting the 3.8% of GDP general government deficit target for 2010, which is why it is difficult to understand why the government wants room to raise the 3% deficit target for 2011. The government cannot count on the EU allowing a bigger deficit than 3% in this “poker game”, he added.
The suspension of the talks could cause the forint to weaken by as much as ten forints against the euro on Monday, Kondrát said. Ádám also said the forint was expected to weaken, though he declined to estimate by how much. Kondrát said the development could give MNB impetus to change the base rate, though not necessarily, at a meeting of rate-setters scheduled for Monday.
The government will probably wait until after local elections in the autumn to reach a new agreement with the IMF and EU, JP Morgan's investment and analyst unit in London said in a note. The government is unlikely to submit the 2011 budget draft until after local elections in October, and the IMF and EU delegations will probably return to the country then, the analysts said. The government's latest measures put the 3.8%-of-GDP general government deficit target within reach, although there could be a small overshoot, within two-tenths of a percentage point, the note said. The IMF wants to see the deficit reduced under 3% in 2011, but the government is probably trying to have the target raised in exchange for structural reforms, it added.
The suspension of talks between the government and the IMF-EU on Hungary's aid package is likely to cause the forint to weaken and government securities yields to rise in the short term, but the real problem will be the effect on investor confidence in Hungary in the mid-term, András Vértes, who heads economic research company GKI, told MTI. Hungary's steps to cut its deficit and undertake structural reforms have won the acknowledgement of international organisations, and the European Union has even used the country as an example for other member states to follow Mr Vertes said. This trend has now been interrupted with the suspension of the talks, he added.
Hungarian Foreign Minister Janos Martonyi blamed the suspension of talks between the government and the IMF and EU on Hungary's financial aid package on "peripheral disputes" related to the planned extraordinary financial sector tax, speaking in an interview on public television on Monday.The IMF-EU said late Saturday that the talks were suspended to give the government more time to consider unresolved issues.
"The dispute with the IMF and EU delegations was not even about whether we wanted to, or could, keep the 3.8pc [of GDP] budget deficit this year," rather they objected to the extraordinary bank levy and its size, as well as that we want to impose it in 2011 as well, Mr Martonyi said. "The goal on the Hungarian side is clear: we want to keep this year's budget deficit," he added.
Mr Martonyi expressed a bit of surprise that the IMF appeared to be taking the side of foreign-owned Hungarian banks on the issue of the levy. "The most important thing for the IMF should be that the Hungarian budget is in order, and for this the announced revenue from the bank levy is necessary," he said.
"All in all, I think more understanding should have been shown with regard to Hungarian economic policy and the bank levy," Mr Martonyi said. "This is not a big tragedy. The talks were suspended, paused, and we will continue them," he added.
Mr Martonyi noted that the suspension was not without precedent. Earlier the IMF suspended talks with Romania, but an agreement was reached in the end.
The government wants to raise about HUF 186bn in revenue from the extraordinary financial sector levy which lenders have said would hurt the economy.
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