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Rating agencies, EU might pressure Hungary into new IMF talks, says City

Hungary might face “a lot of pressure” from credit rating agencies and the EU to resume talks with the IMF once the municipal elections scheduled for early October are out of the way, say London-based emerging markets analysts.

Economists at UBS, a major banking group, said in a conference call that for “Hungary (to be able to) make its living without the IMF”, the global environment would need to remain “very, very supportive on the refinancing side”.

Hungary faces “quite large” refinancing needs in 2011-12; on average, there is more than €8 billion worth of local and foreign currency debt that is maturing in this period, including the funds that have to be paid back to the IMF and the EU. This compares to a €4-6 billion average redemption that Hungary was facing in the past.

Without a supporting refinancing backdrop, or if Hungary fails to reduce its fiscal deficit to below 3% of the GDP next year, then “we believe there could be a lot of pressure on Hungary from rating agencies in terms of potential downgrades ... because the refinancing need is very large in historical terms and market conditions are still very volatile”, UBS said.

Also, “there is very strong pressure from the European Union” to cut the budget deficit from 3.8% of GDP this year to 3% of GDP in 2011, since for the last six years Hungary has been in the excessive deficit procedure, and if a country stays there for a seventh year it could potentially face serious fines and negative repercussions, the bank's analysts added.

In this environment “we believe it makes sense for the Hungarian government to come back to the table with the IMF and the EU and try to make a precautionary deal, but we also clearly recognize that it's unlikely to happen ... before the local municipal (elections), and most probably market 'noise' will be intensifying in the interim period”, they said.

In a separate comment, Royal Bank of Scotland (RBS) said it expects rating agencies to give time the government until the local elections in October, “giving (it) the benefit of the doubt ... but if they don't see then either a recommitment to the IMF/EU program, or real concrete measures in terms of a medium term fiscal program ... they (could) move to cut the rating to junk”.

Citing the potential of a junk, or sub-investment, rating for Hungary, RBS referred to Standard & Poor's where Hungary's sovereign rating is currently BBB minus, the lowest investment grade, with a negative outlook. (MTI – Econews)