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UPDATE - Hungary starts talks on new type of cooperation with IMF

Hungary’s government is starting negotiations on a new type of cooperation with the International Monetary Fund (IMF) in the course of scheduled consultations, the National Economy Ministry told MTI on Thursday.

The ministry said the new type of agreement, unlike the old one, would not increase state debt, as it would not involve taking out a loan but taking out insurance that would boost investor confidence in the country.

Hungary’s economy has undergone a renewal in the past year and a half: the country has ended older types of cooperation that limit its economic independence, and now the focus is on growth, the ministry said. "To achieve [growth], all available instruments must be used," it added.

"For growth, we must first defend our independence. That is, that we can finance Hungary from markets," the ministry said. "This has been made difficult by the prolonged crisis in the eurozone," it conceded.

The ministry said a new type of cooperation with the IMF, tailored to the Hungarian economy and the country’s own interests would be beneficial. Unlike the old cooperation, this new form would increase Hungary’s financial and economic independence, it added.

The forint firmed from over 312 to the euro to under 309 after the ministry made the announcement.

 The cost of insuring Hungarian state debt fell to a low not seen in weeks on news of the announcement. CMA DataVision said the benchmark 5-year mid-spread of Hungary's credit default swaps contracts (CDS) was around 576bp in trade in London late Thursday, down from about 605.4bp at the previous close.

Analysts said a new agreement between Hungary and the IMF could make forint assets more attractive, cause the currency to firm and improve financing conditions for the country.

Timothy Ash, head of global emerging markets research at Royal Bank of Scotland, said the news of the negotiations could win some time from rating agencies, who could possibly put off downgrades, if they were planning such actions.

Neil Shearing, senior emerging markets economist at Capital Economics, a major London-based investment and financial consultancy, also said news of the talks could delay any ratings actions.

The Hungarian Banking Association said a new agreement with the IMF is "not only necessary in the economic environment at present, but (the association) considers it an absolutely useful step that could support stability and development in the coming period as "an extraordinarily important element of the government's independent, responsible and cooperative economic policy".

The National Bank of Hungary (NBH) told MTI it learnt of the government's intentions regarding the IMF from the ministry's statement. In the case of any type of cooperation with the IMF, the commitment of the given country is made jointly by the country's central bank and government, it noted. The NBH must be included at talks with the IMF in the coming period, it added.

Iryna Ivaschenko, head of the IMF's representative office in Hungary, said in a statement late Thursday that the IMF mission in Hungary was only carrying out a regular economic review.

"The IMF team currently in Budapest is conducting a regular Article IV review and the second review under Post-Program monitoring of the Hungarian economy. The mission for the Article IV consultation is not a negotiating mission, but a mission to conduct the regular economic surveillance that the IMF performs for all member countries," she said. "The IMF has not received a request from the authorities to initiate negotiations on a Fund-supported program," she added.