Hungary `Can't Afford' to Delay Deficit Cuts, EU's Rehn Says
Olli Rehn, European Union economic and monetary affairs commissioner, speaks at a press conference during the European Union finance ministers meeting at the Palacio de Congresos in Madrid earlier this year. Photographer: Markel Redondo/Bloomberg
Hungary “can’t afford” to delay efforts to narrow its budget deficit, European Union Economic and Monetary Affairs Commissioner Olli Rehn said, damping Prime Minister Viktor Orban’s drive for leeway to boost growth.
“In a period when the rest of EU-member countries are on the road of fiscal consolidation, Hungary can’t afford to deviate from this path,” Rehn said in an interview published yesterday in the Budapest weekly Vasarnapi Hirek. “Instead of increasing the budget deficit, Hungary should follow sound fiscal policy which is a prerequisite for sustainable growth.”
Talks between Hungary, the International Monetary Fund and EU ended last month after Orban refused to commit to the previous government’s goal of reducing the deficit to less than 3 percent of gross domestic product in 2011. Orban says Hungary needs a wider shortfall to stimulate the economy.
Orban was elected in April on pledges to end five years of austerity that exacerbated the country’s worst recession in 18 years. The government says it plans to resume talks in October, after local elections in which Orban’s Fidesz Party seeks to consolidate power.
“I think we will see increasing push-back from the IMF and the EU in the run-up to October elections,” Peter Attard Montalto, a London-based emerging market economist at Nomura International Plc, said in an e-mail. “Combined with some market-risk aversion, this can cause a generalized reversal of recent trend and a sell-off in Hungarian assets.”
Forint Weakens
The forint has weakened 6.9 percent against the euro since Orban cemented a two-thirds majority in parliament on April 25, the worst performance among more than 170 currencies tracked by Bloomberg. The forint traded at 283.4 per euro at 9:13 a.m. Credit-default swaps, which measure the cost of insuring government bonds against default, rose 90 percent in the period.
Hungary’s budget deficit was 4 percent of GDP last year, down from an EU-high of 9.3 percent in 2006. The previous government pledged to cut the gap to 2.8 percent next year.
Hungary needs to reduce the gap to less than 3 percent in 2011 under the EU’s excessive deficit procedure, Rehn said in the interview with Vasarnapi Hirek. The EU has already extended the deadline twice, he said.
Orban, who is looking to boost economic growth after GDP shrank 6.3 percent last year, has ruled out another year of austerity. Instead, the government approved a special tax on financial institutions to plug budget holes this year.
Earlier Rebuff
European Commission President Jose Manuel Barroso on June 3 told Orban during a joint press conference to “accelerate” efforts to narrow the deficit, “not relax consolidation.” At the time, Orban committed to meeting the 2010 target of 3.8 percent of GDP.
Officials from the IMF and EU left Budapest on July 17 without endorsing the cabinet’s budget plans. Hungary last week said it wouldn’t seek a new loan from the IMF when talks with the Washington-based lender resume later this year, causing the forint to fall.
UniCredit, Citigroup Inc., and Morgan Stanley have in the past month said Hungary would benefit from an IMF safety net if global market conditions deteriorate and make it more difficult for the government to borrow from the market.
Standard & Poor’s and Moody’s Investors Service said last month they may downgrade Hungary’s sovereign credit rating.
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net
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