* Hungary has stepped up rhetoric against IMF over past
* Forint falls, government bond yields jump after minister's
* Government in a bind between competing expectations-source
By Gergely Szakacs and Sandor Peto
BUDAPEST, Oct 29 "Life would go on" if Hungary
does not secure funding from the IMF, its chief negotiator said
on Monday, casting doubt on Budapest's willingness to reach a
deal to help ensure financial stability.
Having requested help from the International Monetary Fund
and European Union nearly a year ago after its debt rating was
slashed to "junk", central Europe's most indebted nation has
since sent mixed signals, saying both that a deal could be close
but also rejecting the conditions it could carry.
Mihaly Varga, the minister in charge of the talks, said the
prospect of a deal would offer little in the way of market
"Obviously, life would go on that way too," Varga told
public radio in an interview when asked whether it would be a
disaster if Hungary failed to secure an agreement with the IMF
and the European Union after months of stop-start talks.
"I would still find it good if we could agree because there
would be a minimal, several tenths of a percent, impact of such
a deal that could help foreign investors buying government
papers feel safer," he said.
After the comments, 10-year government bond yields rose 36
basis points and the volatile forint added to morning
losses, falling to three-week lows.
The prospect of a financial backstop has largely assuaged
investors made nervous by the economic policies from Prime
Minister Viktor Orban's government. It has helped stave off a
jump in bond yields such as that seen in Greece and Spain.
But tension between Budapest and the lenders has risen in
recent weeks after Orban's government launched an ad campaign
saying it would "not give in" to their demands and unveiled a
swathe of tax hikes and other moves that defy IMF advice.
Iryna Ivaschenko, the IMF's representative in Budapest,
declined comment on Varga's comments. But on Saturday she said a
new round of fiscal measures announced by the government this
month ran counter to the IMF's recommendations.
They included reneging on a pledge to halve Europe's highest
bank tax as of next year. The government has also doubled a
planned tax on financial transactions and launched a new tax on
mainly foreign-owned public utilities.
Orban's moves may help him wrestle down the deficit below
the 3 percent next year Hungary needs to avoid the loss of
millions of euros of EU funds. They also avoid austerity that
could further hurt his sliding popularity.
But they are criticised for threatening to stifle an already
weak recovery after a recession this year.
Fitch Ratings, which has the country's debt on negative
outlook, warned Hungary not to eschew IMF support.
Although preliminary meetings have taken place, no date has
yet been set for the next round of talks. Last week marked the
first time that economists saw only a 50-50 chance that Budapest
would reach an agreement, a Reuters poll showed.
Investors have taken advantage of cheap cash flowing from
loose monetary policy in Europe and the United States to snap up
high yielding assets, such as Hungarian bonds that yield far
more than many of their euro zone counterparts.
Those flows have helped Hungary finance itself from domestic
bonds this year. But next year Hungary must repay the equivalent
of 3.6 billion euros ($4.66 billion) to the IMF alone from a
2008 bailout that pulled it back from the brink of bankruptcy.
Budapest has nonetheless stepped up its rhetoric against the
IMF over the past weeks with the government's media campaign
against IMF-prescribed austerity and Orban's declaring the
country would not be ruled by "outsiders".
"They do not want the IMF deal and they need the IMF deal,"
said Viktor Szabo, portfolio manager at Aberdeen Asset
Management. "The market is slowly and steadily learning that
there is no deal in the short or even in the medium term. The
two parties concerned are so far away from one another."
Varga said there were differences in views between the two
sides that made an agreement difficult.
"We are working to try and bring our views closer, and have
the IMF accept or make them understand why the Hungarian
government makes certain decisions," Varga said.
IN A BIND
A source close to the government who spoke on condition of
anonymity told Reuters that Budapest was in a bind between what
he described as competing demands by the EU to keep a low budget
deficit and the IMF which expects reforms to boost growth.
"The EU is entirely focused on the deficit while the IMF on
sustainable growth," the source said. "There could be a
fundamental disagreement between the two approaches."
The source said the government wanted to signal that it was
still interested in a deal but it would not give ground on
policy issues such as a flat tax and pension indexing to
Varga could not say whether the sides would return to the
negotiating table this year but said the European Commission's
assessment of Hungary's latest fiscal adjustment steps due on
Nov. 7 would likely have a bearing on the talks.
"They will decide on the basis of our measures submitted
within the framework of the excessive deficit procedure about
their involvement in the negotiations. They are also discussing
this with the IMF," Varga said.