Hungary may seek less than 20 billion euros from IMF

BUDAPEST Thu Apr 26, 2012 4:13am EDT

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BUDAPEST (Reuters) - Hungary's new loan from the EU and International Monetary Fund will probably be smaller than the 20 billion euro ($26.4 billion) package that saved it from collapse in 2008, according to a senior government lawmaker, the first indication of how much Budapest will seek.

The European Union opened the way for talks on financial aid on Wednesday, ending a five-month dispute over the independence of Hungary's central bank and driving a surge for the country's financial markets.

The ruling Fidesz party's head of parliament's economic committee, Antal Rogan, told Hungarian television that a deal could be done by the end of June - going against analysts' predictions that tensions with Brussels would likely draw out the process into the third quarter.

The government had said in February that it was seeking a loan of up to 20 billion euros, but on Wednesday Minister Tamas Fellegi, who is in charge of negotiations with lenders, declined to give a figure to reporters.

"In 2008 the government thought it would take out a 7-10 billion euro loan whereas the IMF experts decided on double that amount," Antal Rogan, head of parliament's economic committee told private broadcaster TV2 early on Thursday.

"In contrast to that this will be definitely smaller".

Brussels said it was satisfied with Budapest's assurances that its central bank law would be brought back in line with that of the EU, allowing Hungary to discuss a precautionary IMF loan to stabilize its indebted economy.

Hungary needs the financial backstop to cut its high borrowing costs and avert a funding crisis.

"I think the talks can start within 2-3 weeks and depending on how dynamically we can proceed ... the deal could be reached by the end of the second quarter," Rogan said.

BARRIERS

Investors hope that the conditions the IMF sets for aid will bring much-awaited policy predictability but worry Orban will not easily agree to have his hands tied after two years of policy that has hammered foreign-owned business with new taxes and renationalized the pension sector.

While lenders are unlikely to demand an abolition of Orban's flat income tax, a key plank of government policy, they may ask for some changes in the tax system and a strengthening of the budget oversight panel, the Fiscal Council.

Other sticking points could include Budapest's new taxes on financial transactions and telecoms services, which Hungary flagged this week, as the IMF may push for sustainable spending cuts instead.

"In addition to the EU/IMF's focus on policy outcomes, the very nature by which this government makes policy is also likely to come under scrutiny, especially by the IMF," said Mujtaba Rahman, an analyst at Eurasia Group.

"Given much of the decision-making is centralized around Orban, this is also likely to be a very difficult issue to resolve."

Orban, whose conservative Fidesz party holds a big two-thirds majority in parliament, has confronted Brussels with his assertive, centralizing style. He broke ties with the IMF in 2010, saying Hungary needed more control over its own finances.

On Wednesday Hungary's forint surged near to a two-month high against the euro on hopes for a quick deal with lenders, and the government's cost of borrowing over 10 years from bond markets fell by almost 0.8 percentage points to less than 8 percent.

Local markets held onto those gains on Thursday morning.

(Reporting by Gergely Szakacs/Krisztina Than; editing by Patrick Graham)

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