Hungary's ruling Socialists are expected to suffer a crushing defeat in a European parliamentary vote on Sunday which could send the party into disarray and may undermine the government and its reforms. The Socialist minority government led by Prime Minister Gordon Bajnai, in office for only two months, has implemented tough spending cuts to keep the budget deficit in check but the measures pushed the party's dismal poll ratings even lower.
Bajnai's government will have to pass key 2010 tax changes after the weekend vote and will also have to draw up a very tight budget for next year to meet a new deficit target agreed with the International Monetary Fund (IMF) last month.
Hungary's economy hinges on a $25.1 billion IMF-led lifeline and a loosening of the budget before next year's national elections could trigger a selloff in Hungarian bonds and the forint currency, posing a risk to financial stability.
The Socialists are seen winning only 5-6 seats in European Parliament out of Hungary's 22 seats, while the main opposition party Fidesz is expected to get 14-16 mandates and the far-right Jobbik party is also seen sending an MEP to Brussels.
Think-tank Political Capital said in its fresh political risk report on Hungary on Wednesday that the government may hold out until next year's elections but the result of the June 7 vote, and the budget debate later this year could be decisive.
"After the EP vote it cannot be excluded that the fragile parliamentary majority behind the prime minister breaks and early elections come," the report said.
Bajnai, a former economy minister who is not member of the Socialist party, needs the backing of Socialist as well as some opposition lawmakers to pass any measures in parliament.
He said in April when he unveiled spending cuts that he would remain in his post as long as there was a stable majority behind his economic programme, "not one minute longer."
On Wednesday he said more budget cuts could come to contain the deficit
"We embarked on a path the initial successes of which can already be seen and I see no reason why anyone should turn back," Bajnai told MR1 Kossuth radio
"However, I have made it clear back then as I do now that this government remains viable only as long as it enjoys a democratic parliamentary majority," he added
Analysts said that even though the Socialists priced in a big defeat in Sunday's vote, division within the party could rise in the coming months which could erode support for Bajnai and could lead to pressure to loosen spending.
"Critical voices within the Socialist party about the programme would strengthen anyway by the autumn, the question is whether it gets to a stage that they will openly question the programme," said Andras Toth-Czifra, analyst at Vision Consulting. "If they suffer a crushing defeat, it may happen that ... a part of the Socialist party will question the programme and in such a situation it could be tough to get the budget passed."
The IMF and the EU let Hungary raise its deficit target to 3.9 percent of gross domestic product this year, which needs to be cut to 3.8 percent next year, and the central bank warned the deficit could overshoot unless planned further steps are taken. (Reuters)