HUNGARY’S GOVERNMENT is taking a tough line with international lenders and banks – despite the risk of destabilising its economy and scaring away investors – in a game of nerves aimed at easing the pain of cutbacks and securing a landslide victory in forthcoming local elections.
Prime minister Viktor Orban’s determination to push through a controversial levy on banks and to soften Hungary’s target budget deficit for 2011 has put him at loggerheads with lenders and the International Monetary Fund (IMF), which halted funding talks with the Budapest government this week.
The IMF is reluctant to let Hungary scrap plans to bring its deficit below 3 per cent of gross domestic product (GDP) next year, and says the 200 billion forint (€690 million) tax on the finance industry would be a “short-term, distortive measure” that would reduce bank lending and hamper growth.
But Mr Orban says the 3 per cent target for next year was originally a commitment to the EU – not the IMF – and that his government will seek to renegotiate that figure with Brussels, arguing that other countries are being given more time to reduce their deficits.
“The important question is an agreement with the EU – everything else is secondary or insignificant,” Mr Orban said, in comments likely to pique an already frustrated IMF.
The suspension of talks with the IMF means that Budapest no longer has access to what remains of a €20 billion loan that saved Hungary from collapse in 2008. It also throws doubt on a mooted standby loan for 2011-2012, which would help support the country as it pushes through cost-cutting reforms and give much needed confidence to rattled markets.
After the IMF froze negotiations last weekend, the forint plunged, along with the Budapest stock index, while yields on government bonds rose along with the cost of insuring Hungarian debt against default. While Hungary has still been able to borrow on international debt markets, sales of treasury bills have been undersubscribed and yields have been higher than hoped – meaning the government must pay more interest to persuade lenders to offer credit.
Analysts have expressed doubt over Hungary’s ability to secure credit on international markets without the safety net provided by the IMF, raising the spectre of spiralling bond yields and the kind of funding crisis that Greece barely survived earlier this year.
And while Hungary’s big banks are not as enfeebled as Ireland’s, the country has a high public debt at 80 per cent of GDP and a large stock of foreign currency loans held by households, making it vulnerable to shifts in market sentiment.
Why then, is Mr Orban risking financial disaster by shunning the IMF and battering the banks?
Before April’s general election he pledged to end the Socialist government’s austerity programme and instead escape recession by creating jobs and cutting taxes. He also promised to form a more “patriotic” administration – defending ordinary Hungarians’ interests in the face of pressure from banks, foreign governments and international organisations.
To bow to the IMF and bring in cutbacks, or to heed the bankers’ howls of protests over the looming levy, would be a humiliation to the proud Mr Orban. It would also invite punishment in October’s local elections. As the Socialists struggle to reconstruct their party, Fidesz hopes to relieve them of control of Hungary’s major cities, and is intent on emasculating another foe – the far-right Jobbik party, which won 17 per cent of votes in the general election – which is the only obstacle to Fidesz’s domination of right-wing politics.
“The desire to weaken Jobbik pushes Fidesz into a position of more confrontation with foreign entities,” said Peter Kreko of Budapest’s Political Capital think tank. “Fidesz seems to have committed to no compromises with the IMF until after the municipal elections.”
