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Hungary's move toward budget consolidation irreversible

Speaking at S&P's annual seminar, Moritz Kraemer noted that the previous convergence of the CEE region has come to a halt since the accession of the region's countries to the EU.

Hungary „has no way back from consolidating its budget” and the targets set in the government's significant fiscal adjustment program are likely to be met, „at least for the next two years”, a senior official of international credit rating company Standard & Poor's (S&P) said in London on Thursday. Speaking at S&P's annual seminar on European credit ratings, Moritz Kraemer, the rating agency's general director responsible for European sovereign ratings, noted that the previous convergence of the Central East European (CEE) region has come to a halt since the accession of the region's countries to the EU.

Having joined the EU, the region's countries have lost their earlier focus on economic reforms. Kraemer also noted that problems „swept under the rug” before accession had come to light again, citing growing political populism in the region. Hungary was the most prominent case last year, Kraemer said. Although its budget problems are still „massive”, the government's turnaround has been reflected by the recent decision by S&P to upgrade the country's sovereign outlook to stable from negative.

Kraemer noted that Hungary was the only EU sovereign debtor downgraded (from A minus to BBB plus) by S&P last year. He added, however, that it was good news that Hungary is no longer averting the fiscal problem. The Prime Minister's leaked speech was, on the whole a favorable development, forcing the government to take a clear direction towards reforms, he said. Any retreat from here would cost dearly, Kraemer said noting that such risks would grow as the next general general elections (due in 2010) draw nearer, especially if the governing parties do not gain in popularity.

Kraemer added, however, that the fiscal targets were realistic for the period ahead and called the Hungarian government's fiscal programme the most significant consolidation program in the region in the past years. Kraemer said he still maintained that Hungary would be prepared to adopt the euro no earlier than 2014 when asked by MTI. Kraemer said the fact that reforms started when Hungary's budget deficit reached 10% of GDP as well as uncertainty surrounding the 2010 elections could not be overlooked.

Therefore S&P projects Hungary will meet the criteria for adopting the euro only in 2012, after which it must wait two years before joining the eurozone. Asked whether he considered an eventual renewal of political unrest a political risk endangering Hungary's present rating Kraemer said the repetition of last autumn events on a similar scale was unlikely. S&P projects the government will succeed in narrowing the general government deficit to 4.3% of GDP, calculated with EU methodology, in 2008. It expects Hungary's state debt-to-GDP ratio will peak at 79% of GDP in 2009.

The Hungarian Finance Ministry's projection for posting 55.6% of the annual cashflow fiscal deficit in the first quarter „reflect a highly conservative planning”, commented Goldman Sach on Thursday. The investment house said that there was far less seasonality in the cashflow deficits of the past years, noting that in 2006, 38.8% of the yearly deficit was delivered in Q1. GS said the projections both for Q1 and for the whole of 2006 were overly pessimistic, projecting lower deficits for both periods. (Mti-Eco)