EU's Barroso Rejects Looser Hungarian Budget Policy After `Greek' Warning

Hungary’s new government, which is seeking permission from international creditors for a wider budget deficit, must instead accelerate fiscal consolidation, European Commission President Jose Manuel Barroso told Prime Minister Viktor Orban.

Hungary, the first European Union country to obtain a bailout during the credit crisis, is in a “very delicate situation,” said Barroso, speaking alongside Orban today in Brussels. He rejected Orban’s earlier statement that economic growth is a priority.

“Our message to Hungary and to other countries is that they should accelerate their fiscal consolidation and not relax consolidation,” Barroso told reporters. “We shouldn’t oppose fiscal consolidation to growth. Without fiscal discipline, we will not achieve growth.”

Euro-area economies are cutting spending to shore up investor confidence in the common currency, shaken by Greece’s sovereign debt crisis. Hungary has a “slim chance to avoid the Greek situation” and the Cabinet’s primary objective is to avoid a sovereign default, Lajos Kosa, a deputy chairman in Orban’s Fidesz party, said in Budapest today, according to Napi.hu. The party’s press office didn’t immediately comment.

‘Immediately Punish’

The forint fell the most today among 177 global currencies tracked by Bloomberg, weakening 1.1 percent to 278.43 per euro as of 4:33 p.m. in Budapest.

“The Greek comments have clearly spooked the markets,” said Manik Narain, an emerging-market strategist at UBS AG in London. “If Fidesz pushes the budget deficit to about 7 percent to 8 percent of gross domestic product this year without any visible improvement in 2011, there could be a massive outflow from the Hungarian bond market and the forint could come under pressure.”

Orban’s Cabinet members have rejected the need for further austerity measures and Economy and Finance Minister Gyorgy Matolcsy said accelerating growth after the worst recession in 18 years is the priority over fiscal consolidation.

Barroso said the market will “immediately punish” countries that loosen budget policy. Barroso and Orban agreed on the need to carry out “deep structural reforms” to put the country on a sustainable debt path.

Orban, who earlier called this year’s 3.8 percent of GDP deficit target “unsustainable,” said today he is committed to narrowing the deficit. Mihaly Varga, Orban’s chief of staff, this week said the shortfall may reach 7.5 percent of GDP.

Hungary obtained a 20 billion-euro ($24.5 billion) bailout from the International Monetary Fund, the EU and the World Bank in 2008 to avert a default.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net.

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