Hungary pledged to seek a fast agreement on financial aid with the International Monetary Fund and the European Union, which yesterday warned that the country failed to resolve disputes blocking the start of talks.
Hungary wants an IMF deal to reduce financing costs, Prime Minister Viktor Orban said today in Budapest, even as he drew red lines around policies on which he is unwilling to compromise, including a tax system he calls “proportional.”
The government is seeking to quell investor concern that it isn’t committed to an IMF deal after the European Commission, the EU’s executive in Brussels, said Hungary failed to meet preconditions for the start of talks four months after Orban asked for aid as the forint dropped to a record and the country’s sovereign credit grade was cut to junk.
“We need a financial safety net, they call this an IMF deal,” Orban told a business conference today. “Analysts are right that Hungary can finance itself. But it matters at what cost.”
The forint gained 1.1 percent to 293.03 per euro at 12:49 p.m. in Budapest. The currency dropped 3.2 percent in the previous five trading sessions as investors including BlackRock Inc. (BLK), Citigroup Inc. (C) and Royal Bank of Scotland Plc speculated that the government may balk at compromising to obtain a loan.
Hungary sold 49 billion forint ($221.6 million) of debt today at an auction, 9 billion forint more than planned, as financing costs fell for shorter maturities, according to the Debt Management Agency. Hungary raised 22 billion forint in notes maturing in 2015 at an average yield of 8.32 percent, compared with 8.40 percent at the last sale on Feb. 23.
The benchmark BUX stock index snapped a three-day slide to gain 1.1 percent to 18,722.61, led by mortgage lender Foldhitel es Jelzalogbank Nyrt., which advanced 4.3 percent.
The government has “no A and B plan” on an IMF deal, Tamas Fellegi, minister in charge of aid negotiations told another conference in Budapest today. The “contentious issues” between the EU and Hungary are of political and not economic nature, Fellegi said, adding that these “complicated political problems” need to be solved before negotiations can start.
Ready to Start
“The government is aware of the risks and it’s seeking an optimal solution and an IMF deal is unarguably part of this,” Fellegi said, adding that Hungary is committed to market financing. “We’re ready to start talks as early as today.”
The European Commission yesterday took a formal step toward seeking a court order to require Hungary to redraft laws on the judiciary and data protection agency and asked for more information on planned changes to a new central bank law.
The commission yesterday gave Hungary one month instead of the usual two to rewrite the laws or prove that they are in line with EU standards after the government’s previous response, submitted on Feb. 17, failed to resolve the concerns.
The government will “promptly” submit the necessary legal amendments and is awaiting a letter from EU Economic and Monetary Commissioner Olli Rehn on the trading bloc’s concerns regarding central-bank independence as well as specific preconditions to the start of negotiations, Fellegi said.
“The government chose the riskiest tactic by playing for time in the IMF-EU talks and clearly it doesn’t want to come to an agreement despite all of its rhetoric to the contrary,” Istvan Hamecz, head of OTP Bank Nyrt.’s fund management unit and a former central bank chief economist, wrote in an article published in Heti Valasz today. “This tactic is unsustainable and therefore not credible.”
A financing deal would help stabilize the forint, cut government-bond yields and restart commercial lending, Fellegi said. The government previously “underestimated the intensity of market reaction to policy measures and the erosion of market confidence to such a degree,” he said.
Hungary needs a “credible” economic policy turn to improve the country’s risk assessment and cut financing costs, Julia Kiraly, deputy governor at the central bank, told a conference today in Budapest.
At current financing costs exceeding 8 percent, the country would need a primary budget surplus of 3 percent to 4 percent to ensure its debt level stabilizes at around 80 percent of gross domestic product and doesn’t rise further, Kiraly said.
“Without a turn in economic policy, Hungary won’t be able to lower its risk premia, reach the desired primary balance and growth potential,” Kiraly said.
The bailout talks will include the personal and corporate income taxes, the financing of public transport companies, local-government debt, special industry taxes, one-time fiscal measures and a structural overhaul, Fellegi said.
Orban said he won’t compromise on the tax regime, which he said he built in order to protect the middle class. Orban introduced a flat personal income-tax regime last year and was forced to suspend it this year after budget revenue plunged.
Hungary will be “open” to discussing measures to boost growth as one of the “main questions” will be whether Hungary can avert a recession this year, Orban said.
Orban levied special taxes on the banking, energy, retail and telecommunications industries, forced lenders to swallow losses on foreign-currency household loan repayments and nationalized private pension-fund savings to narrow the budget gap and plug holes after cutting the personal income tax rate.
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