BUDAPEST (Reuters) - Under mounting pressure from markets, Hungary said on Thursday it would start talks with the International Monetary Fund on a new precautionary deal, marking a major U-turn by the government, but the Fund said it had not received any requests for a new loan program.
The Economy Ministry said it would begin talks with the Fund about a “new type of cooperation” that will not increase debt, but would work as an “insurance” and would help Hungary retain access to market funding amid turmoil in the euro zone.
Foreign Minister Janos Martonyi told Inforadio later that Hungary wanted to conclude a precautionary agreement with the IMF, which would work as a safety net.
The IMF, which has a delegation in Hungary now on a regular economic review, said it had not been asked by Hungarian authorities to negotiate a new program.
The center-right government, which broke ties with the IMF last year and has since stunned investors with a series of unconventional fiscal measures, has so far rejected the idea of going back to the Fund to secure a financing backstop amid the euro zone debt crisis, which has also hit Hungary’s markets.
But the forint has slumped to all-time lows versus the euro this week and two rating agencies have warned Hungary could lose its investment grade credit rating due to its weak growth outlook and unpredictable policies.
While securing a new financial safety net from the IMF could shore up Hungary’s markets, the move would be seen as a major domestic political defeat for Prime Minister Viktor Orban, who had earlier told voters that under IMF scrutiny Hungary would lose its “economic sovereignty.”
Hungary was rescued from collapse with a 20 billion euro IMF/EU loan in 2008. That loan expired last year.
The forint surged 2 percent against the euro after the government’s announcement.
“A new type of cooperation with the IMF, adapted to our economy which has been transformed on the basis of our national interests, could be a potent instrument which would increase our financial and economic independence instead of hindering it like the old one,” the Economy Ministry said in a statement.
“This new type of cooperation, unlike the old one, would not increase government debt as we do not take out a credit, but we will make an insurance contract in order to increase the safety of investors in Hungary.”
The ministry did not specify what kind of agreement it sought with the IMF.
The central bank (NBH) said it was not aware of the government’s intent to re-engage with the IMF, and stressed that the NBH should also be involved in the talks.
Analysts said the fact that the government has restarted talks with the IMF and was possibly eyeing a safety net type of financing deal could help Hungary avoid being downgraded to “junk” status in coming weeks.
Some analysts had doubts about the government’s intention saying it would be very hard for the IMF and the government to find common ground given Hungary’s unorthodox policies which the Fund opposed earlier.
“We are skeptical. It looks like Hungary are going after a PCL (precautionary credit line) with no conditionality. The IMF would not give any form of backstop without conditionality, which Hungarians don’t want,” said Peter Attard Montalto at Nomura in London.
The U-turn in policy will be damaging to Orban and his ruling Fidesz party, which has already seen its public support plunge since its election victory in April 2010.
The government has earlier dismissed the views expressed by credit rating agencies, saying they held grudges against Hungary, which has rolled out unorthodox economic policies including big taxes on banks and a controversial scheme to help foreign currency mortgage holders repay their loans.
Economy Minister Gyorgy Matolcsy ruled out a new loan from the IMF three weeks ago and on Monday he said the Fund opposed “each and every one of our steps, so our government policy is tuned not according to but in opposition to it.”
“The government can bend over backwards in trying to frame this as a new type of cooperation and that it will give the government greater autonomy than before. But this is their biggest domestic political defeat to date, which will be very difficult to explain,” said Peter Kreko, analyst at Political Capital think tank.
“However, if Orban had not taken this step, his position could have become much more unstable. If a government cannot ensure the country’s financing, it can very quickly lead to the removal of a prime minister.”
Hungary needs to renew close to 5 billion euros worth of foreign currency debt next year, and a cut to a junk rating could make that process more difficult, analysts have said.
The country has enough cash to finance itself in the short run after it secured funding on international markets earlier this year and the government took over $14 billion worth of assets from scrapped mandatory private pension funds.
Editing by Hugh Lawson