* Hungary govt says ready to discuss "everything" with
* Econ min sends letter to ECB: says cbank law in line with
* Forint rebounds from new record lows to euro, yield surges
at 1-year bill auction
* Difficult for govt to back down on controversial policy
* Cbank may need to raise interest rates if market falls
By Gergely Szakacs and Krisztina Than
BUDAPEST, Jan 5 Hungary pledged on
Thursday to seek a quick deal with international lenders to
shore up financial markets which are plunging in a deepening
crisis due to the government's widely criticised policy course.
Budapest faces tough negotiations over a new funding deal
with officials from the International Monetary Fund and EU, who
have made it clear Prime Minister Viktor Orban needs to change
his stance on a law they say curbs central bank independence.
Economy Minister Gyorgy Matolcsy sent a letter to
European Central Bank President Mario Draghi offering to discuss
and address any further ECB queries about a new central bank
The minister in charge of the IMF/EU talks, Tamas
Fellegi, also said the government now wanted to strike a new
funding deal "as soon as possible" and was ready to discuss and
accept any proposal made by lenders if there are in the
The moves follow sharp swings on Hungarian financial markets
which have seen the forint curency plunge and borrowing costs
soar. Exposure to Hungary has also begun to drive up bond
insurance costs in neighbouring Austria.
The government failed to sell the originally targeted amount
in a treasury bill auction on Thursday, pointing to trouble the
government may have with funding in months ahead.
Some analysts said the central bank might have to raise
interest rates soon to halt the sell-off, mirroring emergency
steps it took in 2008.
Hungary sought 20 billion euros from the IMF and EU in a
bailout three years ago, but Orban's conservative government has
only just come back to the table after saying in the middle of
2010 that it did not need any new agreement.
"We are ready to negotiate without preconditions, and we are
ready to discuss everything at the negotiating table," Fellegi
Retreating from Budapest's initial line approach for a
no-strings-attached deal, Fellegi said Hungary would accept a
precautionary standby agreement (SBA) from the IMF, but would
not draw on any funds unless market conditions warrant it.
In his letter to Draghi, meanwhile, Matolcsy, the economy
minister, said the government had amended the central bank law
before it was passed, taking all comments by the ECB into
"In view of the amendments, I am fully convinced that the Act
... is fully compatible with the EU legislation," he wrote.
"Should any further questions arise, we will be at the ECB's
disposal to discuss and address them."
Matolcsy said the government would continue to respect
central bank independence and that the possibility of expanding
the Monetary Council, which the ECB has also criticised, was
meant to allow greater flexibility should the extension of the
bank's duties warrant it.
In a separate statement issued after meeting with the
financial markets regulator PSZAF and the central bank Matolcsy
said the Hungarian banking system was well-capitalised and
stable, capable of resisting external shocks.
BALL IN HUNGARY'S COURT
Since sweeping to power in 2010, Orban's Fidesz party has
tightened its grip on the media and the top constitutional
court, taken over private pension funds and slapped Europe's
biggest tax on banks, prompting a series of international
protests. Orban has pushed on despite the objections.
The European Commission said Budapest needed to find a way
to reassure foreign investors and governments about its
"It's now for the Hungarian authorities to decide how they
want to reassure their international partners and the markets
about the legal certainty of their legal environment in
Hungary," a Commission spokesman told reporters in Brussels.
The forint fell to new record lows versus the
euro on Thursday and credit insurance costs jumped further.
Fellegi's assurance that the government was clear about the
seriousness of the situation gave some comfort.
But government bond yields still traded close to 11 percent
and the cost of insuring debt issued by Austrian banks who are
heavily engaged in Hungary rose, pointing to the risks of
Analysts stressed that any deal with the EU and IMF could
take weeks if not months.
"We should keep in mind that we are discussing the
conditionality and likelihood of a start of talks - not of an
actual deal. We are still at first base," Peter Attard Montalto
at Nomura said.
"We think investors are still underestimating the time it
will take and the distance Mr. Orban will have to move on the
policy front to actually get an SBA with the IMF and EU."
According to central bank data, the government had 1.5
trillion forints ($6.04 billion) in deposits at the central bank
in November. It also has around 600 billion forints worth of
assets left from last year's pensions grab and could sell its
stake in oil and gas group MOL if needed.
This could make Orban feel Hungary still has sufficient
cushion for a few months to meet its refinancing needs even if
it can no longer issue new government debt.
The state must roll over nearly five billion euros worth of
external debt in 2012 on top of forint maturities as it begins
repaying its earlier IMF/EU loan that saved it from financial
collapse in 2008. Foreign investors hold close to 3.8 trillion
forints ($16.53 billion) worth of forint-denominated bonds.
Another burden for an economy facing recession are the
central bank's high interest rates, now at 7 percent now,
and the bank could be forced to raise those further if the
forint's slide continues. By contrast, neighbouring Romania,
which has a precautionary stand-by arrangement with the IMF, cut
its own rates on Thursday to 5.75 percent to boost growth.