Hungary sees recession in 2009, nears IMF deal

By Gergely Szakacs and Balazs Koranyi

BUDAPEST (Reuters) - Hungary's government will make painful spending cuts next year and said on Tuesday it expects the economy to slide into a recession, while the country's financial markets firmed on hopes of imminent financial help from the IMF.

The International Monetary Fund (IMF) is expected within days to agree a standby loan to help Hungary after three weeks of crisis but it is setting tough conditions for the ruling Socialist government.

Prime Minister Ferenc Gyurcsany announced on Tuesday the government will reduce the budget deficit to 2.6 percent of gross domestic product (GDP) next year from an earlier target of 2.9 percent, at the price of cutting social spending and public sector wages which had been regarded as taboo until now.

Gyurcsany said the moves were necessary as the global financial crisis threatened Hungary's financial stability and will drag the economy into a recession next year.

"I propose that we should plan for the worst and hope for the best; we should prepare for Europe and the world to struggle with recession and we should plan for Hungary's economy not to grow but contract by up to 1 percent," Gyurcsany told a meeting with parliamentary parties.

Analysts expect the IMF to lend billions of dollars to help Hungary restore confidence in its banking system, which is heavily exposed to foreign financing at a time when investors are pulling back from developing economies worldwide.

Hungary, which hiked benchmark interest rates by a full 3 percentage points last week to 11.50 percent to halt a slide in the forint, may be in for up to $12.5 billion (8 billion pounds) from the IMF in the form of a standby loan, analysts say.

Gyurcsany indicated some of the new measures were the condition of IMF support but he declined to detail what specific form of help the country could expect.