Budapest (AFP) – Hungary and the International Monetary Fund (IMF) will take a new stab at a 15-billion-euro credit line deal, starting on Tuesday, following months of delay due to controversial central bank reforms.
A delegation of representatives from the IMF and European Union (EU) is due to arrive in Budapest Tuesday for negotiations until July 25.
An earlier effort had ended in late December, when EU and IMF experts had walked out on credit talks with Budapest, citing reforms that they feared would limit the central bank’s independence.
The Hungarian government has since — reluctantly — revised its legislation, which received the European Central Bank’s approval in June.
However, conservative Prime Minister Viktor Orban has already warned the IMF-EU talks could go on for some time, predicting the core issues will only be discussed at the end of the summer.
“Those who are expecting quick negotiations will be disappointed,” he told Hir TV television last week.
Budapest hopes a 15-billion-euro ($18.2 billion) credit line from the IMF and EU will allow it to borrow on the bond market at better rates than the current ones — on July 13, the yield on 10-year sovereign bonds reached 7.85 percent.
Investors’ confidence in the country dipped as a result of the government’s unorthodox economic policies, including the nationalisation of pension funds and crisis taxes on specific sectors, like telecommunications and banking.
Hungary also saw its debt downgraded to “junk” status by all three major credit-rating agencies, prompting bond rates to jump, while the national currency, the forint, grew weaker.
Still, Viktor Orban has been reluctant to comply with EU demands, sowing doubts as to his intentions.
Economy Minister Gyorgy Matolcsy even chose to go on holiday at the exact same time the IMF will be in town.
“The government seems to try to keep the IMF away from Hungary,” the economic research institute GKI observed in a recent analysis.
Having to call on the IMF has been an embarrassment for Orban.
Upon coming to power in 2010, the prime minister had loudly claimed that Hungary no longer needed any help from the institution, which had narrowly saved it from bankruptcy two years earlier.
For now, the state has sufficient reserves — about 10 billion euros, or 10 percent of gross domestic product (GDP) — to keep it going until the end of 2013, according to Gergely Tardos, chief economist at Hungary’s OTP bank.
“That is why it is not in a hurry to strike a deal with the IMF… We believe the government is just trying to negotiate better terms in the deal,” he told AFP.
“But should the international environment worsen, the market could force it to reach a deal very soon,” Tardos warned.
In that case, Budapest would have to “quickly accept the IMF’s conditions,” Adam Keszeg of Raiffeisen Bank added.
Analysts predict the IMF will demand the abolition of crisis taxes, which have hit mostly foreign-owned companies in the banking, retail, telecom and energy sectors.
It could also call for an end to the 16-percent flat income tax, which has created a two-billion-euro hole in Hungary’s budget.
These measures were hotly debated, even prompting threats of court action by the European Commission, which deemed they did not conform with EU rules.
Ever-defiant, Orban said Wednesday that he would only accept from the IMF “conditions that will make Hungary a better country.”
But this may be just hot air, according to economist Gergely Tardos: “The financing costs coming from the IMF-EU are a lot less (compared to the markets), so it’s in Hungary’s interest to come to a deal,” he said.
In any case, observers predict no deal will be made before December.
Export-dependent Hungary was hit hard by the global economic downturn, with GDP falling by 1.3 percent in the first quarter of this year from the last three months of 2011 — in the 27-member EU, only Greece and Portugal did worse.
