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Hungary-IMF row likely to reshuffle reform plans

The dispute that prompted the International Monetary Fund to suspend its review of a rescue loan package given to Hungary might cripple the country’s financing and compel the government to give up some of its reform ambitions.

Citigroup analyst Eszter Gargyán pointed out that the 0.3% gap found in the budget by IMF commissioners is not significant. However, without measures of austerity, the government will lack the resources to introduce the 16% single-bracket personal income tax, one of its key economic reform plans.

Gargyán believes that international pressure will result in the Orbán government reaching a new deal with the IMF, but the exact details will only be revealed after local elections in October.

In this respect, the governing Fidesz party did little to provide the international community any reassurance. Speaking in a morning program of the public television MTV Tuesday morning, caucus leader for the party János Lázár emphatically denied that the municipal vote would be followed by stringency. “The question now is whether the missing HUF 200 billion should be collected from the people or the banks. After 20 years, the government is finally trying to get the money from those that actually have it,” he said.

In the meantime, Hungary remains in the international spotlight over the scuffle. London-based emerging market analysts warned that the governing Fidesz party is playing a dangerous game, while the European Bank for Reconstruction and Development (EBRD) warned that the situation in Hungary could turn contagious.

“Hungary's case carries a contagion risk for other east European countries, but they can protect themselves from this to the extent that they continue their reforms and restructuring,” EBRD President Thomas Mirow told Germany's Handelsblatt daily.

Nonetheless, EBRD expects the matter will be quickly resolved. “I think the Hungarian government will agree on a solution with the IMF in the coming weeks,” he added.

In Hungary, the biggest opposition socialist MSzP called on the government to cancel its economic reform plans and submit a new strategy to Parliament. The radical right Jobbik expressed its support for the government in what it sees as defense of national interests. The green LMP called on the government to change its negotiating strategy, since it is currently endangering Hungarian taxpayers and those with foreign-currency loans.

The tough stance taken by the government negotiators also received high profile approval. OTP Bank boss Sándor Csányi said the IMF should be more lenient, while in an interview with the Wall Street Journal he expressed his support of the proposed bank tax. The Hungarian social forum also expressed strong backing for the government as the refusal to submit to budget cut demands is in the interest of poorer Hungarians. (BBJ)