Hungary and the IMF will take a new stab at a 15 billion euro (US$18.2 billion) credit line deal, starting tomorrow, following months of delay due to controversial central bank reforms.
A delegation of representatives from the IMF and the EU is due to arrive in Budapest tomorrow for negotiations that will go until July 25. An earlier effort had ended in late December last year, when EU and IMF experts had walked out on credit talks with Budapest, citing reforms that they feared would limit the central bank’s independence.
The government has since — reluctantly — revised its legislation, which received the European Central Bank’s approval last month.
However, conservative Hungarian Prime Minister Viktor Orban has already warned the IMF-EU talks could go on for some time, predicting that core issues will only be discussed at the end of the summer.
“Those who are expecting quick negotiations will be disappointed,” he told Hir TV television last week.
Budapest hopes a 15 billion euro credit line from the IMF and EU will allow it to borrow on the bond market at better rates than the current ones — on Thursday, the yield on 10-year sovereign bonds reached 7.85 percent.
Investor confidence in the country dipped as a result of the Hungarian government’s unorthodox economic policies, including the nationalization of pension funds and crisis taxes on specific sectors, like telecommunications and banking.
Hungary also saw its debt downgraded to “junk” status by all three major credit rating agencies, prompting bond rates to jump, while the national currency, the forint, grew weaker.
Still, Orban has been reluctant to comply with EU demands, sowing doubts as to his intentions. Hungarian Minister of National Economy Gyorgy Matolcsy even chose to go on holiday at the exact same time the IMF will be in town.
“The government seems to try to keep the IMF away from Hungary,” the economic research institute GKI observed in a recent analysis.
Having to call on the IMF has been an embarrassment for Orban.
Upon coming to power in 2010, the prime minister had loudly claimed that Hungary no longer needed any help from the institution, which had narrowly saved it from bankruptcy two years earlier. For now, the state has sufficient reserves — about 10 billion euros, or 10 percent of GDP — to keep it going until the end of next year, said Gergely Tardos, chief economist at Hungary’s OTP bank.
“That is why it is not in a hurry to strike a deal with the IMF ... We believe the government is just trying to negotiate better terms in the deal,” he said. “But should the international environment worsen, the market could force it to reach a deal very soon.”
In that case, Budapest would have to “quickly accept the IMF’s conditions,” Adam Keszeg of Raiffeisen Bank said.
Analysts predict the IMF will demand the abolition of crisis taxes, which have hit mostly foreign-owned companies in the banking, retail, telecom and energy sectors.
It could also call for an end to the 16 percent flat income tax, which has created a 2 billion euro hole in Hungary’s budget.