No drive for austerity for now

When CNBC was last in Budapest, Economy Minister György Matolcsy told the news channel that the government was committed to the budget deficit targets. This happened after fiscal consultations with the IMF/EU missions broke down but before Prime Minister Viktor Orbán declared Hungary would not seek to extend/renew its loan agreement with the IMF and would not seek a precautionary stand-by arrangement, either, as it is fully capable of financing itself from the market.

CNBC’s reporter said today local government officials "keep falling out with the IMF, the IMF keeps preaching austerity and they (the Hungarian authorities) say "Hang on, we want to go for growth".

This, Montalto said, "goes back to the misunderstanding markets had about Hungary."

He acknowledged that these were "very mixed messages", but "fundamentally it comes down to attitude, attitude of the government to international lenders and the need for austerity."

Matolcsy said on Thursday Hungary will not "break its back" to lower its budget gap to below 3% of GDP next year, although the previous administration pledged a 2.8% shortfall to international lenders.

"As long as we don’t see any particular, adverse market reaction against Hungary - given the broadly risk-favourable attitude in markets - I don’t think they’ll see any particular reason to do fiscal consolidation," Montalto said.

He believes the next time that will become evident to markets will be in September or October. Hungary can "get away with" the market reaction - which they were rather worried about when the IMF walked out of the fiscal review last month - for now, but eventually it will "come back to bite them," he added.

Attack on c.bank chief, possible EU proceedings

CNBC’s reporter pondered why Hungary is telling the outside world that they are committed to the deficit targets and then have various conversations that suggest they are not. She acknowledged, though that the government is in a way justified in this approach, given the country is ahead of the curve in the EU with regard austerity measures and while its debt levels are not great they are "glowing" in European standards.

One lesson that could be learned from the crisis is that a country can be fine until the markets stop funding it, Montalto said.

In his view, there are "a lot of risk events" coming Hungary’s way.

"The IMF and the EU are unhappy about the reactions of the markets therefore and what these will cause in policy terms in the Hungarian government," Montalto said. Among other things he also mentioned the local elections (due on 3 October), adding that "we may well see the removal of the central bank Governor; that’s on their agenda I think. And there’s also the issue of EU Treaty non-compliance."

Montalto believes the EU, which is "very unhappy" with a number of laws that have been put in place in Hungary, could launch proceedings against Hungary around the end of the summer.

Debt still high

"It fundamentally goes back to the stock of debt," he noted. Hungary’s debt-to-GDP ratio is around 80%.

"They can’t just write off the credibility of the previous Bajnai administration in order to say everything’s hunky-dory," Montalto said, reminding that Hungary grapples with a very high public debt and it is in fact an emerging country not a developed market. "And they do rely on bond inflows which are happening at the moment because the inflows are into funds themselves, but that could well change."

The debt dynamics will be clearly changed by the new levy on the financial sector, from which the government hopes to raise HUF 200 bn in 2010 and 2011 each, as it is likely to lead to growth of 1-1.5% instead of 3% plus some project for 2011-12, Montalto added.

The general view on the market is that Orbán started a dangerous game by showing the IMF the door. They say that by distancing Hungary from the Fund and showing the IMF its place he practically pulled out a safety net from under the country. But there is at least one person who cried out in joy to see someone finally standing up against the "moneycrats".

"The howls of outrage are echoing from Brussels to Washington DC. Like the simian slaves in Planet of the Apes, Hungary has uttered the forbidden word: No," wrote Adam LeBor, the long-time Budapest correspondent for The Times of London."

Source: Portfolio Online Financial Journal