IMF gives green light to Hungarian bailout talks

By bne IntelliNews June 28, 2012

Tim Gosling in Prague -

Hungary is finally set to start talks over a loan programme, after IMF director Christine Lagarde approved the government's amendments to the central bank act. Whilst the news cheered the markets, attention will now turn to the talks themselves, with the two sides entering negotiations from wildly differing positions.

Citing a letter from Lagarde - later distributed to reporters - Mihaly Varga, Hungary's minister in charge of the talks, told a news conference that the IMF director has approved the government's proposed changes to the disputed legislation, reports Reuters. "The proposed amendments and commitments address our key concerns," the letter reads. "Once the proposed amendments are adopted, the Fund will be ready to enter into negotiations on a joint IMF/EU program together with our European partners."

The IMF representative office in Hungary confirmed the contents of the letter, whilst a spokeswoman in Washington said: "The Fund will be ready to start negotiations once the Central Bank law is adopted by parliament. The timing of a mission will be agreed with the Hungarian authorities and the European counterparts." Varga said that parliament should approve the amended legislation by July 12 at the latest, and that talks could start in mid-July.

Yields on Hungary's benchmark 10-year bond dropped 3 basis points to 8.02%, whilst five-year credit default swaps fell to 519.16bp, the lowest since May 9 according to Bloomberg. The forint, which spent most of the day sliding to a 0.8% loss against the euro, recovered to just a 0.1% fall to trade at 286.51 per euro at 7 pm on the news.

However, the seven months since Prime Minister Viktor Orban performed an about face to ask the IMF and EU for a loan programme have been filled with conflicting claims over what kind of help is likely.

Many still suspect Budapest of "doing a Turkey", in other words, dangling the prospect of a bailout to keep the markets off its back with little genuine intention to agree a deal. Should Hungary push for the programme it claims to be seeking, the talks are likely to turn out to be another long-winded process.

The IMF and EU will clearly demand stiff conditions on any loan programme, making it dependent on fiscal and economic targets, whilst they will also want to reign in Budapest's "unorthodox" economic policy-making, which has hit foreign investors particularly. It is that latter point that interests the markets also.

However, Hungary has a very different outlook, and has repeatedly claimed that it does not "need" a bailout to keep its head above water, but would like a safety net. In other words, it intends to seek a deal similar to a flexible credit line - a last resort buffer with little conditionality which is handed only to countries with a strong fiscal track record. That unrealistic demand appears to be yet another insurance policy against actually sealing any kind of deal, and the race between Hungary's current account surplus, its rollover debt obligations and the Eurozone crisis looks set to rumble onwards.

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