Hungary Shows IMF Austerity `Dangerous' for European Recovery, CEPR Says
Europe’s recovery is at risk as the International Monetary Fund refuses to give way on fiscal goals, threatening to impede growth for bailout recipients like Hungary and Greece, the Center for Economic and Policy Research said.
The IMF and European Union on July 17 abandoned talks on the continuation of Hungary’s 20 billion euro ($26 billion) rescue program after Prime Minister Viktor Orban failed to convince lenders his government is committed to budget cuts. Orban last week said the country must “restore its economic self rule” and focus on growth. The fund is also demanding austerity measures of Greece in return for financial support.
Hungary’s dispute with the Washington-based fund over deficit reduction goals “does show that a certain lack of flexibility on the part of the IMF can be dangerous to the rest of Europe,” said Mark Weisbrot, co-director at the Washington- based center, whose advisory board includes Nobel laureates Robert Solow and Joseph Stiglitz, in a July 26 interview.
Weisbrot said the IMF’s presence in the financial package to support Portugal, Ireland, Italy, Greece and Spain -- dubbed the PIIGS -- may impose anti-growth policies across the region. The Greeks have adopted budget cuts and revenue raising measures equivalent to more than 14 percent of gross domestic product since October. Orban pushed for wider deficit than the 2.8 percent IMF-backed target for next year.
“The most disturbing thing is that the IMF is heavily involved now in the so-called rescue package for the PIIGS countries, to the extent that they have a certain level of influence that supports pro-cyclical policies,” Weisbrot said. “You do have the risk that the recovery will be avoided. That could have major repercussions for an area that’s about a quarter of the world economy.”
Euro-area governments are in the process of approving a 750 billion euro financial stability fund designed to boost confidence in the single currency and support euro members in need of funds. The IMF, which is a joint contributor with the EU to Greece’s bailout, is providing 250 billion euros to the regional rescue facility.
The euro has lost 14 percent against the dollar since a Nov. 25 high. Since the euro-area rescue was announced on May 10, the euro is up 1.9 percent, signaling investors support the austerity measures designed to reduce debt that are framed in the package.
At the height of the credit crisis the IMF provided about $65 billion of loans to eastern Europe, making it the largest recipient of the fund’s bailouts. The region required more than $100 billion in total, including contributions from the EU and the World Bank. The IMF has provided loans to Hungary, Latvia, Ukraine, Romania and Serbia as the countries faced defaults and struggled to refinance debt, often denominated in foreign currencies.
The IMF’s policies are “dangerous for eastern Europe too,” said Weisbrot. “To the extent that you don’t allow any of these economies to recover it can have repercussions for the rest of the region.”
Orban said his government will only negotiate with the EU on its fiscal targets after its IMF program expires in October. Orban said he expects credit-rating downgrades and market “turbulence” as a result of the cessation of IMF talks. Standard & Poor’s and Moody’s Investors Service last week said they may lower their ratings for the country’s debt. S&P’s cut would take the grade to junk.
“There will be other downgrades,” and “temporary turbulence,” Orban told reporters in Budapest today. “Then the forint’s exchange rate and the country’s capacity to sell bonds returns to the level in which the country can be said to function in a stable way,”
The forint has lost 5.3 percent to the euro in the past three months. It traded at 283.31 as of 4:38 p.m. in Budapest from 282.75 late yesterday.
The fund on July 8 urged EU policy makers to take further “decisive” steps to combat the region’s sovereign-debt crisis. The IMF has called on policy makers to reduce budget deficits, formulate plans to wind down or recapitalize weak banks, and make “fully operational” a rescue fund to backstop the euro.
“Recent global stability gains are threatened by a confluence of sovereign and banking risks in the euro area that, without continued and concert attention, could spill over to other regions,” the IMF said then.
While the IMF forecasts global growth of 4.6 percent this year, its sees the 16-member euro region expanding 1 percent.
In 1997, the IMF demanded spending cuts and interest-rate increases on Thailand in return for a $3.9 billion loan. Within six months, the fund said its measures had been too severe as Thailand’s tax revenue and economic output plunged. The CEPR last year published a study criticizing the IMF, arguing loans to Hungary, Latvia and 39 other recipient nations came with terms that threatened to impede economic recovery.
During last year’s credit crunch “there were cases where they were more flexible than in the past, but they still had a pro-cyclical bias and that was true of the overall majority of the IMF programs during the world recession,” according to Weisbrot. “It’s still a big problem.”
Hungary’s economy shrank 6.3 percent last year, and the European commission expects it to stagnate this year. Latvia had the steepest recession in the EU last year with an 18 percent contraction and the commission still predicts a 3.5 percent drop in GDP for this year. Ukraine’s government sees 6.5 percent growth this year after the economy shrank 15 percent last year.
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