Hungary's Funding May Dry Up in 2011 Without IMF Support, Citigroup Says

Hungary may be unable to raise sufficient funds on financial markets in 2011 if global conditions deteriorate and the government fails to extend its International Monetary Fund program, according to Citigroup Inc.

The IMF and EU on July 17 suspended 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. The government indicated it may abandon previous plans to set up a “precautionary,” stand-by agreement with the Washington-based lender for 2011.

“If external conditions deteriorate and Hungary’s weaker fiscal position triggers further downgrades, external funding may dry out in the absence of a safety net,” Eszter Gargyan, a Citigroup economist in Budapest said today in an e-mailed note.

Credit rating companies said last month they may lower Hungary’s debt grade because of the collapse of talks with the IMF and EU and the lack of a clear commitment from the government for continued fiscal adjustment.

Standard & Poor’s said July 23 it may cut the rating to junk from BBB-, its lowest investment grade. Moody’s Investors Service placed Hungary’s Baa1 rating on review for possible downgrade the same day.

Investors have speculated the government may delay further austerity measures until after local-government elections Oct. 3. The forint, which dropped to a 15-month low against the euro the day after talks broke down, has gained 3.4 percent since.

“The government is likely to be reluctant to announce sizeable austerity measures even after the local municipality elections” and will aim to reach agreement with the EU to keep the budget deficit target for 2011 unchanged at 3.8 percent of gross domestic product, Gargyan said. The previous government agreed to narrow the shortfall to 2.8 percent in 2011.

Hungary “won’t break its back” to bring the budget shortfall to less than 3 percent of GDP in 2011 when the average deficit in the EU will be 7 percent, Economy Minister Gyorgy Matolcsy said in an interview published today on the website of HirTV today. The government may continue talks with the IMF-EU delegation in October, he said.

To contact the reporters on this story: Edith Balazs in Budapest at Ebalazs1@bloomberg.net.

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