- Markets braced for turmoil after IMF and EU withdraw £17bn Hungary financing deal
European equity and credit markets are braced for a volatile day of trading after the International Monetary Fund (IMF) and the European Union dramatically withdrew a €20bn (£17bn) financing deal for Hungary over the weekend.
By James Hall
Published: 11:30PM BST 18 Jul 2010
The move, which was described by economists as “very rare”, means that Hungary will not have access to standby funds that were secured as part of a 2008 loan deal. The credit line was suspended on Saturday after the European Commission voiced concerns over the newly-elected Hungarian government’s budget plans.
The stark move by the IMF and EU will reignite fears in global stock and money markets about the state of Europe’s sovereign debt. It could also derail the fragile confidence that has been returning to markets after moves to resolve the economic crisis in Eastern Europe.
Hungary’s woes come amid fears of a broader bear market developing as investors adjust to signs of a global slowdown led by the US and China. The weekend’s events will only add to market jitters.
Economists have argued that the return of confidence to Europe is partly based on the assumption that the IMF and the EU will automatically step in as sugar daddies to save failing economies. The suspension of the review of Hungary’s credit line at the weekend will send out an international warning and shows such views to be naïve, observers said last night.
Peter Attard Montalto, economist at Nomura Securities, described the IMF and EU’s action as “a very rare event”.
“Countries usually go out of their way to satisfy these missions,” he said.
Hungary has Europe’s highest public debt at 80pc of GDP.
Viktor Orban, Hungary’s prime minister who was elected in the spring, last month unveiled a significant austerity package.
However, the European Commission deemed this to be “largely of a temporary nature” and said that the measures “fall someone short” of what is required.
In a statement, the IMF said that Hungary must to reassure markets by achieving the budgetary targets.
“In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced… remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” it said.
Attard Montalto, of Nomura, said: “The IMF and EU, given their usually very diplomatic language, have given some very strong statements of disapproval. The post mission statement talks about the fact that clarity isn’t available on policy, the need to respect central bank independence – when have we ever heard that before about a country? – and unsustainable and damaging policies that the new government is putting in place.
“Equally the EU has also said some of the new laws enacted are illegal in the EU.”
Hungary said that it will continue talks with the IMF and the EU in the hope that it would be allowed to continue to draw on the remainder of the loan in the future.
Zoltan Torok, an analyst at Raiffeisen, said: “This is fairly bad news and a mistake by the government.
“The market impact will be negative with a likely over 1pc or possibly bigger currency fall and a jump in yields.”
On WSJ: Hungary Minister: IMF Talks Break Off On Lack Of Austerity
- BUDAPEST (Dow Jones)--Hungary's talks with the International Monetary Fund and the European Union broke off Saturday as the government refused to implement fiscal austerity measures to reach this year's budget deficit target, Economy Minister Gyorgy Matolcsy said Sunday.
"We said that further austerity measures cannot be carried out...That's the problem that we are in the fifth year of austerity measures, that's why we are where we are," Matolcsy said in an interview on private television channel HirTV.
The IMF and EU walked out Saturday from their latest review of Hungary's EUR20 billion credit line that would allow the country to draw on the remainder of its credit, which will expire in October.
The IMF said Hungary continues to face fiscal challenges and should present sustainable and structural means of reducing its budget deficit.
Instead, Hungary wants to levy an extra financial-sector tax to cover most of the missing revenues to meet this year's budget shortfall of 3.8% of gross domestic product.
"The (IMF and EU) partners didn't accept this view. They are in favor of this peculiar austerity policy," Matolcsy said.
Should there be "no bank tax, the IMF suggested the launch of a Romanian or Ukranian-type set of austerity," Matolcsy added
This is not an option says the Hungarian govt! Hungary govt says further austerity not an option
- Hungary's government stuck to its plans for a new financial sector tax this year and ruled out further austerity measures at talks with international lenders that were suspended at the weekend, the economy minister said.
Gyorgy Matolcsy also told public television m1 in an interview on Monday that International Monetary Fund and EU representatives have voiced concerns over the 200 billion forint tax and a bill which would put a ceiling on public sector pay, including the central bank governor's sala
And nicely put... Hungary versus the IMF
- The Hungarian forint plunged against the euro in early trading today after the acriminious collapse on Saturday of talks between the government and an International Monetary Fund/European Unio delegation on the country’s €20bn rescue loan programme.
Hungarian equities plummeted 4.8 per cent at the opening in Budapest, with bank stocks over 6 per cent down.
The currency fell as much as 2.8 percent against the euro and was trading 2.66 percent lower at 289.37 at 8:50a.m in Budapest compared with 282.10 at the close on July 16. The Forint forint has now lost over 9 per cent against the euro in the past three months, buffeted by fears about the economic plans of Viktor Orban’s government, that took power in April.
Budapest today pledged that there would be no surrender to the IMF/EU’s demands for a tougher budget for 2011 and concerns about a proposed bank levy. Gyorgy Matolcsy, the economy minister, defiantly said on television on Monday: “We have told our partners that further austerity packages were out of the question.”
He added: “On the other hand, we asked a sacrifice from the bank system. This was the bone of contention, the financial sector tax, where we disagreed. Our partners would still like to negotiate about this (but) we cannot tell them anything positive on this front for this year.
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