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UPDATE 3-Hungary vows fast IMF, EU deal as markets gyrate
January 5, 2012 / 11:11 AM / 6 years ago

UPDATE 3-Hungary vows fast IMF, EU deal as markets gyrate

* Hungary govt says ready to discuss “everything” with lenders

* Econ min sends letter to ECB: says cbank law in line with EU rules

* Forint rebounds from new record lows to euro, yield surges at 1-year bill auction

* Difficult for govt to back down on controversial policy course

* Cbank may need to raise interest rates if market falls continue

By Gergely Szakacs and Krisztina Than

BUDAPEST, Jan 5 (Reuters) - 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 law.

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 country’s interest.

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 said.

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 serious consideration.

“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 intentions.

“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 contagion.

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.”

RECESSION RISK

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.

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