Monday, July 19, 2010

Looks like Hungary will not be joining the euro any time soon

On the Economist blog you will find this rather mysterious news item:
MONDAY may be a good time to pick up Hungarian assets on the cheap. The IMF and the EU walked away from negotiations with the Hungarian government on Saturday after the latter refused to give in to the international organisations’ demands for more clarity on the country’s plans for tax and spending. It seems safe to assume the Hungarian forint will start the week with a sharp lurch downwards.
The reference is to a Reuters story:
The IMF and EU suspended on Saturday a review of Hungary's funding program, set up in 2008 to save the country from financial meltdown, saying it must take tough action to meet targets for cutting its budget deficit.

Suspension of talks means Hungary will not have access to remaining funds in its $25.1 billion loan package, created by the International Monetary Fund and European Union and which it now uses as financial safety net, until the review is concluded.
Not everything is bleak, though:
Christoph Rosenberg, who led the IMF delegation to Hungary, signaled that the Fund wanted more on next year's budget. "By definition when we come next time -- unless we come next week -- the government will have made more progress on the 2011 budget and that will be a very important budget," he told Reuters.

In an interview, he also said the IMF had not discussed the possibility of a new financing deal for 2011 and 2012.

"We are aware of what has been said in public but in our meetings we didn't really get to that point, because we obviously needed to first resolve the policy issues and those have not been resolved," he said.

The EU issued a separate statement saying the conclusion of the review had to be postponed and further talks should be held at a later stage.

"Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU. I welcome the authorities' commitment to the 2010 deficit target," said Olli Rehn, Commissioner for Economic and Monetary Affairs.

"However, the correction of the excessive deficit by next year will require tough decisions, notably on spending."
What the EU wants to see is that magical 3 per cent deficit target in next year's budget. Without that Hungary cannot contemplate entering the euro (unless it manages to fudge the figures a little better than it has done so far).

As the Economist adds, FIDESZ won a landslide victory in April by promising many things, some of which are mutually incompatible. There are local elections coming in the autumn and the far-right party, Jobbik, with a somewhat left-wing economic agenda, is snapping at the heels of FIDESZ. Perhaps, Prime Minister Orban assumes that faced with the possibility of a victory by Jobbik, the IMF and the EU will relent.

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