Reuters | Mon Jul 19, 2010 | 3:52pm IST
Hungary’s markets sold off on Monday after talks with lenders fell through at the weekend, rattling investor confidence in the government’s policies and raising concerns over the country’s debt vulnerability. Hungary’s government had insisted on a new financial sector tax this year and rebuffed lenders’ calls for further austerity measures, the economy minister said on Monday. The forint plunged over 2.5 percent versus the euro and yields surged 20-30 basis points as the collapse of the talks — intended to review the IMF/EU financing deal Hungary struck in 2008 — dealt the second major blow to investor confidence since the new centre-right government took power in May. In early June, officials alarmed markets by comparing Hungary’s problems with those of Greece.
The International Monetary Fund and European Union have both said the government needs to take tougher measures to rein in the budget deficit. Analysts said market weakness could spill over to other markets in the central European region, and the sell-off would likely to push the Hungarian government to reach agreement with its lenders soon. "Arguably continued adherence to the current IMF programme had anchored both markets and Hungary’s (credit) ratings: the fact that Hungary is now going off-piste suggests both may be under threat," said Timothy Ash at Royal Bank of Scotland.
RATE RISE TALK
Hungary, which runs central Europe’s highest public debt at about 80 percent of gross domestic product (GDP), won’t be able to use remaining funds in its 20 billion euro ($26 billion) loan secured in 2008 until it reaches a deal with the IMF and EU. Even though Hungary is not under immediate financing pressure, such delays would raise its financing costs, potentially forcing the central bank to raise interest rates and putting pressure on Hungary’s ratings, analysts said. The central bank will hold a regular rate meeting on Monday with a rate decision
announcement due at 1200 GMT. Analysts last week projected the bank would keep interest rates on hold at 5.25 percent , but after the weekend events some of them said the bank may raise rates if markets fall further and the forint weakens past 300 to the euro. Shares in Hungary’s OTP and the foreign lenders most geared to the country — Austria’s Erste Group Bank and Raiffeisen International fell on Monday. Erste Group and Raiffeisen fell 2.3 and 4.6 percent, respectively.
NO MORE AUSTERITY PLEASE
Economy Minister Gyorgy Matolcsy told television m1 on Monday that the IMF and EU voiced concerns over a 200 billion forint tax planned by the government to contain the deficit and a bill which would cut the central bank governor’s salary. The IMF said on Saturday that Hungary will need extra measures to meet its deficit targets this year and in 2011. The European Commission said reducing Hungary’s deficit by next year "will require tough decisions, notably on spending." But Matolcsy said: "Hungary has experienced a programme of austerity over the past five years, we inherited this from the previous governments and we would like to do away with the unfortunate consequences of these steps. We have told our partners that further austerity packages were out of the question."
Matolcsy confirmed the government wanted to meet this year’s budget deficit target of 3.8 percent of GDP, but he said for this the planned tax on banks was necessary. Analysts said the Hungarian government might try to delay firm decisions on the budget cuts until after Oct. 3 municipal elections where it wants to solidify its powers. "A further escalation is likely as the Hungarian government has demonstrated a very confrontational style before," Danske Bank said in a note. Citigroup said it believed market pressure "will force the government to present a detailed economic program for 2011 in the coming weeks … The lack of agreement means Hungary’s access to market funding may freeze, especially if European financing conditions deteriorate."