Hungary Poised for ‘Tortuous’ IMF Talks, Capital Economics Says

Hungary should prepare for “tortuous” negotiations with the International Monetary Fund, even as a selloff in assets prompted officials to soften their tone about conditions attached to a possible loan, Capital Economics Ltd. said.

“A deal now looks closer than it has done for some time, but it would be complacent to think that there are no further obstacles ahead and that a deal can be secured quickly,” William Jackson, an emerging-markets economist at the London-based research company, wrote today in an e-mailed note. “We would not be surprised to see Hungarian assets come under further strains.”

Hungary is reviving bailout talks with the IMF and the European Union after the international creditors suspended negotiations last month on concern new central bank legislation violates monetary policy independence. Fitch Ratings on Jan. 6 followed Moody’s Investors Service and Standard & Poor’s in downgrading the country’s sovereign-credit grade to junk.

While changing the central bank law will have a high priority at the talks, the government’s “unorthodox” economic policy measures, such as a bank levy, the effective nationalization of private retirement savings and forcing banks to take losses on foreign-currency mortgages, will also come under fire, Jackson wrote.

Hungary is probably seeking an aid package of 15 billion euros ($19 billion) to 20 billion euros, enough to cover 2012 state financing needs that Capital Economics estimates at 15 billion euros, Jackson wrote.

The government may also have to assist the banking industry, where 19 billion euros of foreign debt matures this year, he wrote. Lenders may struggle to refinance external liabilities should western European parent banks be reluctant to roll over debt at their Hungarian units, according to Jackson.