EU go-ahead suggests compromise but talks still likely to be lengthy

Initiatives

The European Commission's go-ahead for the EU/IMF talks over a new financing package without all the outstanding issues having been addressed suggests an unexpected degree of compromise but the upcoming negotiations are still likely to be drawn out and disagreements may well arise along the way, London-based emerging markets analysts said on Thursday.

In its Daily Currency Briefing released to investors in London, Commerzbank said that "as nothing seemed to have happened" regarding the key issues open for debate, the EC's announcement "came as a particular surprise".

The announcement "leaves a certain aftertaste, as the EU and the IMF seem to be more willing to compromise than the Hungarian government".

The danger this entails is that on the long term the credibility of the IMF agreement could suffer as a result of potentially "excessively lax conditions". Moreover, it remains questionable how reliable a safety net from a precautionary agreement would be if all market participants are aware that the necessary requirements have not been met, Commerzbank's analysts said.

London-based analysts at Goldman Sachs said, however, that "despite this positive news", they do not think a new financing agreement is imminent as the government has to actually implement the promised revisions to the central bank law before any agreement.

Regarding the type and the size of the financing deal, the government is likely to prefer a Flexible Credit Line (FCL) over a Stand-By Arrangement (SBA). However, Hungary is unlikely to qualify for the FCL and the IMF is likely to suggest at least a large precautionary SBA, if not a fully-fledged SBA, with actual disbursements, to reduce financing risks and secure a high degree of oversight over policy formulation and execution.

However, "we still think that the government will try to minimize the influence of the international lenders on its economic policies, and disagreements on the degree of their involvement are likely to arise".

"We continue to think that the program will have to be sizable, to the order of about €12 billion-16 billion ... a less favorable external environment could require a total package of as much as €20 billion", economists at Goldman Sachs said.

Timothy Ash, head of Global Emerging Markets Research at Royal Bank of Scotland said, however, that an IMF program of "perhaps only half the size of the prior (€20 billion) program would likely be sufficient this time around - this is more to provide some assurance to markets rather than hard cash ready for disbursement".

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