Hungary dodges bullet, but seen slow to learn

By Krisztina Than - Analysis

BUDAPEST (Reuters) - Hungary has averted financial crisis in the short term with a huge IMF-led rescue package but even this narrow escape has failed to sober up the country to the need for economic reforms.

The worst global financial crisis of 80 years and the prospect of a recession have failed to galvanize the country's politicians to find a compromise on reforming social spending, a bloated state sector and the tax system.

Without these fundamental changes Hungary will inevitably remain a laggard of central eastern Europe, with anemic economic growth, an oversized state and the highest interest rates in the 27-member European Union at 11.50 percent.

Neighboring Slovakia, which carried out reforms in time, has seen its growth surge and its imminent euro adoption on January 1 has largely shielded its markets from the global crisis.

"The danger of explosion is over but there is no real chance for reforming the state and re-thinking its redistribution and regulation role in the coming two years," think-tank Political Capital said. "Problems such as the extremely high tax burden and social expenses will be choking the Hungarian economy."

The crisis has failed to remove deep political rifts and the Socialist minority government is unlikely to push through any meaningful reforms before the next elections due in 2010.

The October crisis was the fourth time since the end of communism in 1989 that Hungary had to avert the threat of a collapse of public finances and stem a flight of foreign capital from its financial markets and government bonds.

Quick-fix spending cuts and tax hikes had in the past always resulted in a "soft landing" from periodic crises, but this time the global credit crunch threatens, along with forecasts of a protracted economic recession and rising unemployment.

A $25.1 billion mega loan from the International Monetary Fund and the EU and a government promise of faster budget cuts helped restore some confidence in Hungary's markets.

The government pledged to cut the deficit to 2.6 percent of gross domestic product next year from 3.4 percent this year, by cutting public sector wages and curbing pensions -- politically unthinkable prior to the recent financial troubles.

"An IMF package with EU support will act as a key anchor on fiscal policy going forward," said Gillian Edgeworth, analyst at Deutsche Bank in London.

"Nonetheless the path will not be an easy one and lowering debt ratios toward those seen in other emerging markets in Europe and elsewhere will be a multi-year process."

REFORM A DIRTY WORD

While the emergency spending cuts could prevent a loosening of the budget ahead of the next parliamentary elections in 2010, the crisis looks unlikely to prompt Hungarians to rethink the role of the state and support painful reforms.

Prime Minister Ferenc Gyurcsany has failed to complete changes in the health sector due to high public opposition.