Hungary PM mulls IMF loan revision

15/05/2009 | Peter Murphy

Hungary’s new prime minister Gordon Bajnai yesterday said his government may consider extending or renegotiating its $25.1 billion IMF-led programme, amid rising fears that his fragile government could collapse before its one-year term ends.

In an interview with Emerging Markets in Budapest, Bajnai launched a spirited defence of tough new austerity measures, as new data showed a sharper than expected economic decline.

Bajnai said the government’s reform plan had won the widespread backing of financial markets and international officials, including the IMF and EU authorities – as well as the majority of a divided public.

“The government is already delivering on its promises of swift and decisive action,” he told Emerging Markets. But “it is not impossible that we would look to extend or amend our IMF programme beyond 2010. “Recently things have been going in the right direction – albeit in a very fragile way.”

His comments came as official figures released yesterday show first quarter GDP contracted by 6.4% year-on-year – more than expected. The economy is expected to contract by 6% this year.

Bajnai said that his government’s reforms had exceeded the demands of international creditors. “Our programme actually goes beyond the original IMF requirements for structural reforms and budgetary discipline”, he said.

An IMF mission, in Budapest this week for a quarterly review of Hungary’s performance, will decide on the disbursement of a third tranche of the loan. IMF conditions require Hungary’s deficit does not exceed 3% of GDP, but reports this week suggest the Fund may relax this to 3.9%, pending the conclusion of talks on Monday.

Bajnai noted that Hungary’s “risk assessment has improved recently, partly due to an improving international finance market but also partly due to our policies.” But he added that “the markets remain volatile, however, and it is still early days.”

While acknowledging public discontent over austerity measures, Bajnai insisted that “more than 70%” of Hungarians “believe in” the budget reforms.

Bajnai, a politically independent businessman and former economics minister, lashed out at opposition politicians and other critics of reform.

“If the opposition don’t want to bankrupt the country, they will need to keep reasonable and rational financial policies. Giving incentives carries a cost. “Anyone in their right mind knows what is fundamentally possible. You can’t reduce taxes without reducing costs.”

The centre-right opposition Fidesz party this week called for Bajnai’s resignation and early elections, following a proposal for a controversial new property tax from 2010. Fidesz has said it will not support the new prime minister’s government, saying early elections are the only way of restoring voters’ trust in politics.

The opposition is poised to win forthcoming elections to the European parliament – a fact analysts say could trigger the government’s demise. But Bajnai insisted his government would survive the vote and that early elections could thrust Hungary into political chaos. “The Socialist-led coalition has signed up to this programme and are approving the measures. An election campaign now would bring potentially damaging and prolonged insecurity”, he said. 

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