Hungary Survival Without IMF Support Is `a Myth,' Nomura's Montalto Says
Hungary's Prime minister Viktor Orban. Photographer: Balint Porneczi/Bloomberg
Hungary won’t be able to access capital markets if it can’t reach agreement with the International Monetary Fund and the European Union on the terms of its bailout loan, Nomura International Plc said.
The IMF and EU on July 17 abandoned talks with Prime Minister Viktor Orban’s government on a review of the 20 billion euro ($26 billion) loan after failing to agree on fiscal targets to comply with its terms. Economy Minister Gyorgy Matolcsy said he expected a new loan agreement will “eventually” be reached.
Hungary’s assumption it can finance itself without the IMF’s backing is “a myth” as risk aversion can rise anytime, said Peter Attard Montalto, a London-based emerging market economist, in an e-mailed note today.
The country’s debt management agency has missed its sales target at four bond auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.” The comments helped send the euro to a four-year low against the dollar on concern Europe’s debt crisis may be spreading.
“Hungary does need an extension,” of its IMF and EU borrowing facilities, “even if it keeps the money for a rainy day,” Montalto said. The view that “Hungary has access to market sources, does not need help from the IMF in 2011, and has a very comfortable rollover picture” is “a myth.”
Montalto suggests the comments “sound like Greece six months ago.”
Failed Auctions
Greece is relying on a 110 billion-euro emergency-loan package and quarterly reviews of its fiscal consolidation plans. The government needs to cut its budget deficit to within the EU’s 3 percent gross domestic product limit in 2014 from 13.6 percent last year.
Hungary’s failure to sell all the T-bills offered at this week’s auction is “a worrying sign when yields on a country’s three-month bills go up 25 basis points in a week and the debt management agency revises its selling volume,” Montalto said. “Even if it used IMF money held in foreign-exchange reserves it would only last till the end of next year. Running down reserves is not a sound policy.”
Investors have speculated the Hungarian government may be delaying any announcement of further austerity measures until after local-government elections in October. The forint, which dropped 3.5 percent to a 15-month low the day after the talks broke up, has gained 3 percent since on speculation Hungary will reach a deal. The government expects an IMF-EU delegation to return in September.
‘Not Credible’
The view that “everything will be fine after the local elections and Fidesz will do the hard work necessary to reach the deficit targets,” is also a “myth,” according to Nomura.
An agreement would require “a significant shift on the part of the government,” Nomura said. “Our understanding from the lender missions is that the problems lie in the government’s attitude to the talks and the substance of the policy proposed. After the elections we doubt that the government will undergo such a structural shift in its view on so many policies.”
After the talks broke down, Orban said Hungary will deliver on its commitment to bring this year’s budget deficit to 3.8 percent of gross domestic product, adding that it’s within the power of the government to decide on the means to achieve this budget target.
“We do not view these forecasts as consistent or credible, and think the government must be basing them on very strong assumptions about revenues and the success rate of implementation of plans already announced,” Montalto wrote.
Greater commitment to austerity after the elections will be too late, according to Nomura.
The government “seems very much averse to implementing further structural spending cuts, which the IMF judges are necessary,” wrote Montalto. “Also, after the elections it will be too late to adjust policy to meet this year’s targets and very late in the budgetary process for next year.”
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net
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