Hungary’s currency must reflect the risk that Prime Minister Viktor Orban may walk away from rescue negotiations with the International Monetary Fund without agreeing on a loan, Rabobank International said.
The talks probably won’t be concluded this year and the forint should better reflect the risk that they won’t end in a financial rescue, Christian Lawrence, a London-based strategist at Rabobank, wrote in an e-mailed note today. Hungary is seeking a credit line of between 12 billion euros ($15.5 billion) and 15 billion euros and may agree on a deal in November should talks resume next month, chief negotiator Mihaly Varga said, the daily Magyar Nemzet reported on Sept. 21.
Hungary requested aid in November as its credit rating was cut to junk. Negotiations for a loan were delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the IMF and the European Union.
“We remain very skeptical of these talks being concluded in 2012 and are still of the view that the forint is not fully pricing in what we see as the significant downside tail risk of Orban walking away from the talks completely,” Lawrence wrote. “We expect talks to be dragged out into next year and an agreement to be finally reached, but ‘walking away’ is certainly a non-negligible risk.”
The forint fell 0.4 percent to 283.16 versus the euro as of 1:10 p.m. in Budapest today. It has been the world’s best performer against Europe’s single currency this year, gaining 11.3 percent, helped in part by expectations of an aid deal.
The latest round of IMF talks stalled after Orban on Sept. 6 rejected cutting pensions and scrapping an extraordinary bank tax as well as other measures to reduce the budget gap and boost growth. Orban said those policies were the IMF’s conditions, while the Washington-based lender said the next day that his list contained “significant inaccuracies.”