Prime Minister Viktor Orbán said he expects to see an IMF deal in the autumn. “Naturally, there are differences in viewpoints and opinions, but I see the will on both the Hungarian and on the other side to reach a deal,” the government’s International Communic-ations Office quoted him as saying on Wednesday, citing Dow Jones Newswires. The office also suggested it should be possible to cut a deal without scrapping the government’s billion-euro job protection plan, which is dependent on a controversial proposed tax on financial transactions – even those of Hungary’s central bank – that has already been criticised at the European level.
What the IMF may want
The following day, the pro-government newspaper Magyar Nemzet published a list of putative IMF demands that it says was distributed among Fidesz politicians at a party congress in the western city of Sárvár. The list contains conditions that would require humiliating government U-turns on several cornerstones of Economy Minister György Matolcsy’s “unorthodox” economic policy: pension cuts, raising the retirement age, cutting family benefits, raising personal income tax, privatisation, reducing transport subsidies, curtailing bureaucracy, introducing a universal and value-based property tax, cutting local council municipal spending, and the abolition of the bank-tax and subsidies for the banking sector.
The 2013 budget will probably have to be modified but Hungary expects to reach a loan agreement with the IMF-EU by the end of the year, caucus leader of the ruling Fidesz party Antal Rogán had said in an interview published on Wednesday by the same right-wing paper. Rogán explained that an IMF deal would help Hungary to avoid the negative effects of the financial crisis.
But if the cabinet sticks to what it has previously communicated regarding its economic strategy, and the leaked list is a true reflection of the IMF’s preconditions, it is hard to see how negotiations could lead to anything but deadlock.
The measures in Magyar Nemzet’s scoop would be far more severe than those demanded of Hungary in exchange for its 2008 IMF-led bailout. This fact prompted the news website index.hu to speculate that the “leak” could be merely another government attempt to stoke up anti-IMF sentiment. “Though these measures have been mentioned individually in the past, it seems unrealistic that the IMF would demand them altogether,” index.hu write. Furthermore, it noted that suggestions of increasing income tax revenue never implied an across the board raise, but rather the scrapping of Fidesz’s flagship 16 per cent flat tax – widely seen as iniquitous, favouring the wealthy – and the reintroduction of a progressive system.
Desire for a deal is real: PM
Prime Minister Viktor Orbán told the Fidesz caucus on Wednesday that there is still “a strong intent to reach an agreement with the Monetary Fund,” the weekly news magazine HVG reported citing a government source. Orbán apparently said that by year’s end the cabinet will discover whether it has enough bargaining power to make its own decisions, and have the European Commission and the IMF accept these decisions.
Investing in the forint
While the true nature of the IMF’s conditions will not be known until the fat lady sings, economists – and Hungary’s chief IMF negotiator Mihály Varga – warn that an agreement with the Washington-based lender and the European Union is needed to stabilise the economy and the national currency. Financial services corporation Citigroup said on Wednesday that the forint – which, returning from a precipitous fall, has been the world’s second-best performing currency against the euro this year – could begin to suffer if negotiations are delayed further. In an investor report quoted by financial news website portfolio.hu, Citigroup analyst Eszter Gárgyán said that Hungary could become more vulnerable in the upcoming months. And uncertainty remains.
“It is still not known whether talks will actually resume in September,” Gárgyán said. The latter declaration may have been a reference to statements last week from the IMF headquarters and Tamás Szûcs, the Head of The European Commission’s Representation in Hungary. They both said that the date for talks to resume has not been set yet. Nevertheless, on Wednesday, Varga – who was finance minister under the last Orbán administration – told the business daily Világgazdaság that “the Hungarian delegation still expects parties to keep to the schedule determined earlier and resume negotiations in September”.
Premium rates unaffordable
Whether in the autumn or later, an agreement seems to be necessary to get Hungary back on track. Large chunks of government debt are coming up for repayment, and the market is demanding premium rates – way beyond those for Spain or Portugal – for lending cash to Orbán’s government. Most observers estimate Hungary will need a standby loan of around EUR 15 billion – and the economic policy commitments that come with it – to reassure potential lenders of its medium-term creditworthiness.
Signs of weakness
It appears more than likely that Hungary’s economy, which slipped back into recession in the second quarter, will be smaller by the end of the end of the year than it was at the start. And other economic indicators are not good. Studies from the Central Statistical Office revealed that in the second quarter fixed capital investments declined by 5.9 per cent compared to the same period of the previous year and the volume of sales in retail shops decreased by 1.7 per cent yr-on-yr.