Hungary PM jilts IMF, to discuss budget with EU

BUDAPEST/BERLIN Wed Jul 21, 2010 6:16pm BST

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BUDAPEST/BERLIN (Reuters) - Hungarian Prime Minister Viktor Orban said on Wednesday his government would discuss the 2011 budget only with the EU and long-term negotiations with the IMF, Budapest's other international lender, were pointless.

Orban noted that Hungary's deal with the International Monetary Fund, part of a rescue to avoid a financial meltdown in 2008, expires in October -- when his centre-right Fidesz party also has to fight municipal elections.

But Orban, speaking on a visit to Berlin, did not say whether his government still wanted to seek a new precautionary deal with its international lenders for 2011 and 2012, following the suspension of talks with the EU and IMF last weekend due to an impasse over budget cuts.

Most analysts have said Hungary, which runs central Europe's highest public debt at 80 percent of GDP, needs a safety cushion from the IMF and European Union in case sentiment on world financial markets turns negative.

But they say Orban has taken a tough line with the IMF over demands for cuts partly to avoid voters deserting his Fidesz party in the local elections on October 3.

"We need to reach agreement not with the IMF, but with the EU, on how we reduce our deficit from 3.8 percent to a level below three percent as expected by the European Union," Orban told a news conference with German Chancellor Angela Merkel.

"We need to negotiate that with the European Union. We will do that," he said through an interpreter. "Our budget for next year we will do with the European Union in accordance with these negotiations."

Fidesz has stuck resolutely to its promises of cutting taxes and creating jobs to spur economic growth, rather than imposing the deep cuts demanded by lenders and adopted by the Socialists who were punished when Fidesz swept to power in April parliamentary elections.

FREER HAND

The leader of Hungary's far right Jobbik party also said on Wednesday that "there is life without the IMF," putting pressure on Orban's government to take a tough line with the international lenders.

But once the October elections are over Fidesz should have a freer hand, with the next national vote not due until 2014, analysts say.

Economy Minister Gyorgy Matolcsy told Reuters a week before the talks with the IMF and EU fell through that Hungary would seek a safety net for the next two years, even though it is currently able to finance itself from markets.

"What Orban is saying in Berlin is perplexing," said Peter Attard Montalto at Nomura in London.

"Firstly he says (there is) no point in discussing long run policy as (the) deal was coming to an end -- this is totally (the) opposite of what he has said in past about looking for an extension of the IMF/EU lending agreement. Also (it) shows they clearly think they don't need any more money," he said.

The forint fell sharply after the lenders suspended a review of the 20 billion euro (16.9 billion pound) funding agreement signed in October 2008 after they failed to get sufficient clarity of the government's future economic policies.

The currency has regained ground since then but uncertainty is keeping markets shaky.

Hungary needs to bring its budget deficit below 3 percent of GDP next year under an EU Excessive Deficit Procedure (EDP). But the government said would it press on with plans to tax banks this year and next, despite IMF and EU calls for structural spending cuts, as it woos voters before the October elections.

Orban's government has shown surprisingly little sensitivity to financial markets since winning its landslide victory in April, and analysts said it was unlikely to back down with the international lenders to avoid losing face -- and votes.

RESPECTING THE RULES

Merkel noted that although Hungary was not a member of the euro zone, as an EU member it also needed to respect the bloc's budgetary rules limiting deficits to 3 percent of GDP.

Fidesz vice chairman Lajos Kosa fired another warning shot on Wednesday, saying the IMF should be realistic when considering a 2011 deficit goal of 2.8 percent of GDP.

"It is obvious that Hungary's situation is one of the most difficult of all member states in European Union. In such a situation, expecting us to run the lowest deficit ... they can say that, but this will not work," he told public m1 television.

"The IMF must be mindful to remain grounded in realities."

Analysts do not see any government change of heart soon.

"Orban sticks to an issue if he believes he can win ... and I think with the bank tax, he will not back down," said Csaba Toth, political analyst at think tank Republikon.

Fidesz wants to pass the bank tax in parliament on Thursday to raise 200 billion forints (591.3 million pounds) from the financial sector both this year and next, even though lenders said deficit cuts should be based on durable structural measures, especially in 2011, to make the budget sustainable in the long run.

(Reporting by Krisztina Than and Gergely Szakacs; Editing by David Stamp)

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