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Hungary Targets Early 2012 Safety-Net Deal With IMF and EU

Hungary requested help from the International Monetary Fund and the European Union to bolster investor confidence in the most indebted eastern member of the European Union that is one step away from junk grade status.

Hungary may reach an agreement with the groups “in the first months of next year,” the Economy Ministry said in an e-mail today. Hungary wants “insurance” from the IMF that doesn’t infringe on the country’s ability to formulate its economic policy, Premier Viktor Orban said on MR1 radio today.

The government reversed a policy of shunning IMF assistance after the forint fell to a record low against the euro and government bond yields soared. Standard & Poor’s last week warned that it may cut Hungary’s credit rating to junk this month.

“We want an insurance and we don’t want to tie our hands,” in reference to a “new type” of IMF agreement Hungary is seeking, Orban said. “No one can limit Hungary’s economic sovereignty, that’s the basic tenet of the government’s philosophy.”

The forint, the world’s worst-performing currency since June 30, erased losses today and traded at 307.1 per euro at 1:10 p.m. in Budapest. The currency surged as much as 2.6 percent yesterday, the most in 18 months, before paring gains after the IMF said it wasn’t approached.

While the European Commission, the EU’s executive arm, is aware of Hungary’s intention to seek aid from, it hasn’t “received any request yet,” commission economics spokesman Amadeu Altafaj told reporters in Brussels today.

Orban’s Policies

Orban’s policies, including the levying of extraordinary industry taxes on several industries and forcing banks to swallow exchange-rate losses on foreign-currency mortgages, harmed investment and growth as Europe’s debt crisis is boosting financing risks, S&P said on Nov. 11.

The Cabinet wants to boost investor confidence with a “new type” of cooperation that doesn’t entail a loan, the Economy Ministry said yesterday. The Washington-based lender hasn’t received a request to “initiate negotiations on a Fund-supported program,” it said in a statement.

If Hungary can reach “not a ‘new’ arrangement, but engage with the IMF in the correct style the IMF expects that would be sensible,” Jeremy Brewin, who helps manage about $3.8 billion in emerging debt at Aviva Investors in London, said by phone. “Doing nothing isn’t an alternative.”

‘Sign of Weakness’

Orban, who leads the most-indebted eastern member of the European Union since last year, has rejected seeking a loan from the lender to avoid interference with his “unorthodox” economic policy. Asking the IMF for help would be “a sign of weakness,” Economy Minister Gyorgy Matolcsy told Heti Valasz in its Oct. 27 issue.

Hungary’s IMF request was intended to stem a market sell-off on a possible credit-rating cut, the news website Origo reported yesterday, citing “several” unnamed sources with knowledge of the decision. The Economy Ministry, in its haste, failed to notify “several” Cabinet members, in addition to the IMF, Origo said.

“The Economy Ministry’s apparent haste in issuing a statement which seems not to have been coordinated with the IMF may be a sign the government was keen to make a pre-emptive move before a possible downgrade in the coming days,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in an e-mail today. “We expect increased volatility in Hungarian asset prices until the terms of any new IMF-cooperation are clarified.”

Emulating Turkey

The central bank was unaware of the government’s request to the IMF, the Magyar Nemzeti Bank’s press office said in an e-mail yesterday. The previous day, policy makers warned they may have to “gradually” raise interest rates to defend the forint after keeping the benchmark rate at 6 percent for the past nine months.

Hungary may be emulating Turkey with its overture to the IMF, according to London-based economists Tim Ash of Royal Bank of Scotland and Peter Attard Montalto of Nomura. Turkey and the IMF had been discussing a possible stand-by loan accord for more than a year and a half when the government in Ankara announced in March 2010 that it no longer needed a backstop.

“In the Turkish case the markets bought it, as keeping the IMF engaged provided some reassurance that in a worst case scenario IMF financing was still close at hand, even if a formal program had not been negotiated,” Ash said in an e-mail. “By keeping the IMF engaged in talks it had the insurance of an IMF program within reach but without paying the fee.”

IMF Options

A so-called Flexible Credit Line is a type of IMF assistance with no conditions. The FLC is reserved for countries “with very strong fundamentals, policies, and track records of policy implementation,” the IMF said on its website. Poland, Mexico and Colombia have such agreements.

The Precautionary Credit Line is the IMF’s latest facility, introduced in August of last year, which is for “countries with sound fundamentals and policies, and a track record of implementing such policies.” While countries eligible may not meet the criteria of the FLC given some “moderate vulnerabilities,” these don’t require the same “large- scale policy adjustments” as traditional stand-by loans, according to the IMF.

Fewer Conditions

A PLC has fewer conditions than a stand-by loan, which Hungary obtained in 2008 to avert a default during the credit crisis. The stand-by loan’s conditions were “streamlined and simplified” in 2009 during the global financial crisis that struck after the collapse of Lehman Brothers Holdings Inc. to make it more “flexible and responsive” to countries’ needs, according to the IMF’s website.

Hungary’s IMF agreement would need to provide at least 4 billion euros ($5.4 billion), equivalent to Hungary’s external financing need next year, to bolster investor confidence, Simon Quijano-Evans, a London-based strategist at ING Bank, said in an e-mail yesterday.

An IMF team is in Budapest conducting a regular “Article IV review” and the second “post-program monitoring review,” Iryna Ivaschenko, the lender’s representative in Hungary, said in her statement. The team is not there for a “negotiating mission,” she said.

“Hungary has reached a turning point,” the Economy Ministry said in its statement yesterday. “This new type of cooperation with the IMF, unlike the old one, increases our monetary and economic independence.”

Investors are shunning riskier countries’ bonds as Italy -- with a debt load bigger than that of Spain, Greece, Ireland and Portugal combined -- struggles to ward off contagion from a crisis that started in Greece more than two years ago and threatens to infect weaker economies.

Hungary scrapped two debt offerings and reduced its offer eight times at auctions in the past three months as demand waned and yields rose. Hungary was the first EU member to obtain an IMF-led bailout in 2008.

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