Monday, July 19, 2010

Hungary And IMF Break Off Talks

Hungary's elite have angered the global financial gods at the International Monetary Fund (IMF) and EU.   Budapest is balking at dancing to the austerity dirge as dictated by the money-men from Washington and the bureaucrats in Brussels.  The move has spooked markets with the Hungarian currency, the forint, falling to a fourteen month low. 

The IMF and EU broke off talks with Budapest on July 18 after the Hungarians refused to scrap plans to add a bank tax instead of the favorite IMF-type bromide: social spending cuts.

Hungary is trying to get its hands on the rest of a 20 billion euro IMF loan agreed back in 2008.

According to a research note from Citibank, Hungary still has around 4 billion euro available from the 2008 standby agreement which expires in October.

So far in 2010, Hungary has not used any of the IMF funds at its disposal and would need to complete the interrupted review to access more money.

"Hungary needs to make tough decisions and savings," intoned European Monetary Affairs Commissioner Olli Rehn.  

However, Hungarian Prime Minister Viktor Orban is digging in his heels, announcing his government won't gouge the public any further.  

"We've told our partners that further reductions measures are out of the question," said Hungarian Economy Minister Gyorgy Matolcsy.  

Talking to Hungarian public TV station M1, Matolcsy said Hungary has already instituted 120 billion forints worth of cuts in government spending. 

As the Informant has reported Hungary is reeling from the global financial crisis

The 2008 financial crisis hit the country particularly hard because many homeowners had taken out loans in foreign currencies at much lower interest rates - especially the Swiss franc. Monthly repayments surged when the forint fell, leading to fears of soaring defaults.

Unemployment is 11.4, one of the highest in eastern Europe.

To deal with the crisis, IMF-prescribed bromides -- internal devaluation in order to lower wages to make them 'competitive' -- are squeezing people further.

Hungary now has Europe's highest VAT tax at 25 percent.

Besides a drop in the value of the forint, insuring Hungarian debt is now at a record high.

For example, insuring a 10 million euro Hungarian bond will cost 365,000 euros.

And with the ruling party Fidesz facing municipal elections on Oct. 3, Orban can hardly afford to jam more austerity measures on prostrate Hungarians.   

"Hungary is again on the front pages of the world media," lamented the Hungarian news site,

But not for the first time. 

Just six weeks ago, Orban sent speculators reeling, blathering out the country is in a "very serious situation", a la Greece, Europe's poster child for profligacy. 

And there are worries that Hungary's finances could be worse than stated.

The government has strongly denied comments by officials that the deficit could reach 7.5 percent of GDP and is close to defaulting on its debt.

However, a few analysts argue things aren't as bad as they are being reported.

Hungary began implementing austerity measures in 2006 to reduce its deficit, said analyst Sandor Richter of the Vienna Institute for International Economic Studies in an interview with the AP news agency.

He said the center-right Fidesz party, which recently won a two-thirds parliamentary majority, now faces a tough task of saving face as it realizes its campaign promises of immediate and radical tax cuts are not feasible.

"It is a very delicate situation, but I hope very much that reason will win and that they will follow the economic policy of the previous government," Richter said.

A recent analysis by the Vienna-based bank RZB Group, meanwhile, said the "doomsday words" of Fidesz politicians were "designed to cool down the expectations of the voters (about the tax cuts) and to prepare them for potentially uncomfortable measures."

Hungary is rare but not alone in Eastern Europe in rising up against the IMF.

In Romania, the Constitutional Court declared as unconstitutional plans to cut retirement pensions by 15 percent, as per the dictate of the IMF.

Not deterred, the Romanian government has sniffed out other ways to fleece its people, raising the stealth VAT tax from 19 to 24 percent.  All state-sector workers will see their salaries cut by 25 percent, according to Novinite.

The IMF apparently was pleased, agreeing to release the delayed fifth tranche of the 13.6 billion euro bailout package for Romania. 

Will it only be a question of time before Hungary bows down fully to the IMF?
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