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Hungary’s Debt Reduction Hinges on Economy, Matolcsy Says

Dec. 7 (Bloomberg) -- Hungary will enact a new law that will require the government to cut the level of public debt each year that the economy expands, Economy Minister Gyorgy Matolcsy said.

“Public debt has to continuously drop as long as the growth of gross domestic product is positive,” Matolcsy told reporters in Budapest today. The rule will be suspended in case of a contraction, he added.

Prime Minister Viktor Orban has focused his economic policy on cutting debt and narrowing the budget deficit since coming to power last year. Hungary, the most-indebted eastern member of the European Union at 81 percent of gross domestic product at the end of 2010, will cut the ratio by 10 percentage points in 2011, excluding the impact of exchange-rate changes, Matolcsy said.

The debt level will fall to between 65 percent and 70 percent by 2015, according to the minister. The Cabinet last week proposed delaying until 2016 a constitutional rule passed in April that forces the government to keep cutting public debt until it reaches a constitutional limit of 50 percent of GDP.

The economy will probably grow between 0.5 percent and 1 percent in 2012, less than a previous forecast of 1.5 percent, Matolcsy said, adding that reserves built into next year’s budget ensure that the country will meet a deficit target of 2.5 percent of GDP.

‘Minor Adjustments’

“I don’t exclude, however, that the government will pass minor adjustments to the budget,” Matolcsy said.

Hungary reversed more than a year of shunning aid to seek assistance from the International Monetary Fund last month after the forint fell to a record low against the euro. Moody’s Investors Service cut Hungary’s credit rating to junk level later in the month.

The government has asked the central bank to help boost economic growth with monetary tools, Matolcsy said, adding that the Magyar Nemzeti Bank should start buying corporate bonds and mortgage notes.

Matolcsy has asked central bank Governor Andras Simor to identify “monetary tools and resources the bank can use to help Hungary’s economic growth remain in positive territory,” he said. “We only expect solutions that the European Central Bank, the Bank of England or the Federal Reserve use on a daily basis.”

The banking industry may “receive help” from the central bank’s foreign-currency reserves in the conversion of household foreign-currency loans if the central bank and lenders agree on this, Matolcsy said.

“Foreign-currency reserves are a big treasure, we need to protect them, we can’t use these reserves for any kind of program aimed at boosting growth,” Matolcsy said.

Hungary’s foreign-currency reserves stood at 33.5 billion euros ($44.8 billion) at the end of November, according to central bank data published today.

To contact the reporters on this story: Edith Balazs in Budapest at; Andras Gergely in Budapest at

To contact the editor responsible for this story: James M. Gomez at

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