IMF says start of aid talks hinges on Hungary government

BUDAPEST Wed Dec 28, 2011 12:13pm EST

An illustration picture shows a Hungarian Forint and Euro banknotes displayed in OTP bank in Budapest, November 23, 2011.  REUTERS/Laszlo Balogh

An illustration picture shows a Hungarian Forint and Euro banknotes displayed in OTP bank in Budapest, November 23, 2011.

Credit: Reuters/Laszlo Balogh

BUDAPEST (Reuters) - Hungary's government would need to agree to discuss disputed policies such as a central bank law if it wants to start talks with the International Monetary Fund on a new loan, the IMF said on Wednesday.

Informal talks between Hungary and its former lenders, the IMF and European Union, collapsed in mid-December due to two legislative proposals - one seen as limiting the central bank's independence, and a 'stability law' that would entrench the centre-right government's unorthodox economic policies such as a flat income tax rate.

Hungary's forint currency weakened to 308.80 the euro from 307 on Wednesday, partly because the IMF comments stirred market fears that the talks would be derailed.

Hungary needs to roll over 4.8 billion euros (3.8 billion pounds) in foreign currency debt next year, on top of substantial forint-denominated debt. While it can finance itself from markets now, it needs the IMF agreement to shore up investor confidence to retain access to market funding, particularly given the uncertainty generated by the euro zone crisis.

The European Commission said last week that it had not yet decided on resuming aid talks with Hungary.

On Wednesday Christoph Rosenberg, IMF Mission Chief on Hungary, responding to a Reuters question on whether talks would resume in January, said no decision has been made on when and if formal negotiations would start.

He said the IMF had told the government that given Hungary's vulnerabilities, a Stand-By Arrangement (SBA) with quarterly monitoring would be the best means of supporting the government's efforts to address economic challenges.

"Because Hungary does not face an imminent financing need, such an arrangement can be treated as precautionary. Preparatory work on a program cannot continue until the government indicates that it is willing to proceed on the basis of a SBA," Rosenberg said.

"No decision has therefore been made about whether and when formal discussions on a Fund-supported program will commence," he said in an emailed reply to Reuters.

The government has said it aimed for a precautionary and liquidity line (PPL) - and to continue to finance its debts from the markets.

Neighbouring Romania has a precautionary standby arrangement with the IMF.

CENTRAL BANK LAW DUE TO BE PASSED

European Commission President Jose Manuel Barroso had asked Prime Minister Viktor Orban to withdraw the two contested laws, but Orban rejected the request. Hungary's parliament, where the ruling Fidesz party has a two-thirds majority, passed the financial stability law on December 23, while a final vote on the central bank legislation is due on Friday.

Rosenberg also said additional concerns emerged regarding new legislation proposed by the government, which led to an interruption in the discussions earlier this month.

"If the government is interested in proceeding on program discussions, it should demonstrate its willingness to engage on policy issues that are relevant to macroeconomic stability. This includes close consultation on the proposed central bank legislation and the financial stability law as part of the negotiations," he said.

While Orban is seeking a funding deal, he does not want lenders interfering with his policies which included big special taxes on banks and a renationalization of pension assets.

After informal talks with lenders were cut short, Orban stated the disputed laws would be passed, although he said Hungary was still intending to sign a new deal with the IMF.

He has also told HirTV Hungary would "stay on its feet" even if there was no agreement reached with the IMF.

The disputed central bank law has been amended by the ruling Fidesz party to bring it into line with the European Central Bank's opinion, but the ECB has said it was still concerned that plans to expand the Monetary Council and increase the number of deputy governors could pose a risk to the bank's independence.

Hungary targets one of the EU's lowest budget deficits nxt year at 2.5 percent of gross domestic product, but faces the prospect of a recession, and its state debt at around 80 percent of GDP is the highest in central Europe.

(Reporting by Krisztina Than; Editing by Ruth Pitchford)