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Fidesz is playing a dangerous game

Hungary is not facing immediate financing risks after talks with the joint IMF-EU mission came to an end over the weekend without complete agreement but a prolonged funding cut-off from the international lenders may make it "very difficult" for Hungary to finance itself, and Fidesz is playing a "dangerous game", London-based emerging markets analysts said on Monday.

Timothy Ash, head of global emerging markets research at Royal Bank of Scotland, said that prior to the current review, the IMF had shown "considerable flexibility" with Hungary, repeatedly allowing the fiscal deficit targets to be raised. It seems, however, that the Fund "has now had enough and will now not tinker with fiscal targets anymore".

Given that the Fidesz administration did not reportedly intend to draw the money that would have become available after the IMF review had it been successful, deficit financing will not be directly impacted. However, there will be a severe indirect impact. Yields on Hungarian government debt will rise, making it more expensive for the authorities to borrow, and in the event of a total sell-off, deficit financing may still become very difficult, Mr Ash said.

"Indeed, without IMF financing over the longer term we doubt that Hungary can fund itself". Moreover, "unless something can be agreed to very quickly", the risk is that Hungary may be downgraded by ratings agencies as a result of the uncertainties that arise out of Sunday's developments, given the country's high debt dynamics, he added.

Dabid Oxley, emerging markets economist at Capital Economics, a major London-based consultancy, said that "Fidesz is treading a very risky path ... at best, Hungarian financial markets look set for an extremely bumpy ride over the coming weeks and months ... at worst, Hungary could be muddling into a future fiscal crisis". "This is a dangerous game to play at a time when the eurozone is mired in a sovereign debt crisis".

And while the government says it is resisting calls for further austerity measures to protect the nascent economic recovery, ironically, the violent swings in the forint caused by the uncertainty actually strengthen the headwinds to growth, as with the forint falling, the local-currency burden of FX loans soar, hitting both corporate and household balance sheets, Mr Oxley said.

JP Morgan's London-bases emerging markets analysts said that Fidesz may have hoped to postpone the announcement of any further tightening measures until after the municipal elections on October 3. Yet, intensifying market pressure might convince the government to announce further measures in coming weeks.

On a similar note, analysts at UBS said that financial markets might not grant the government breathing space until the municipal elections, and in this case the Hungarian government would have to present measures earlier to soothe investor sentiment. (MTI)