Hungary Pledges to Seek Quick Deal With I.M.F.

BUDAPEST — Hungary pledged on Thursday to seek a fast agreement with international lenders to shore up its financial markets as its currency and bonds plunged further in a deepening crisis surrounding the government’s policy course.

Officials were forced to cut the value of a treasury bill auction and some analysts said the central bank might have to raise interest rates soon to halt the sell-off, an emergency move that would mirror steps it took in 2008.

Hungary sought €20 billion, or about $26 billion, from the International Monetary Fund and the European Union in a bailout three years ago. But the new conservative government only just came back to the table in November, after saying in mid-2010 that it did not need any new agreement.

Its minister in charge of the talks, Tamas Fellegi, said Thursday that the government now wanted to strike a new funding deal “as soon as possible.” He said it was ready to discuss any proposal made by lenders, and would accept them if they are in the interest of the country.

“We are ready to negotiate without preconditions, and we are ready to discuss everything at the negotiating table,” he said.

He added that Hungary would accept a precautionary standby agreement from the I.M.F., but would not draw on any funds made available unless market conditions make it necessary.

Hungary, which like much of Europe is facing a possible recession, must roll over nearly 5 billion euros worth of external debt this year — on top of maturing debt denominated in forints — as it begins repaying the I.M.F./E.U. loan that saved it from financial collapse in 2008.

Since sweeping to power in 2010, Prime Minister Viktor Orban’s Fidesz party has tightened its grip on the media and the top constitutional court, taken over private pension funds and slapped Europe’s biggest tax on banks — prompting a series of international protests and unnerving markets.

After the forint’s fall to a new record low versus the euro on Thursday, and a further jump in credit insurance costs, Mr. Fellegi said the government was clear about the seriousness of the situation. He added that a weaker forint was a serious problem with regard to repaying debt.

But investors continued to ditch Hungarian assets as they fear the talks with lenders will be very hard, given the government’s unorthodox policies and its previous tough stance.

The forint briefly firmed after Mr. Fellegi’s comments but remained highly volatile while 5-year and 10-year bond yields fell by about 50 basis points to below 11 percent, after surging to 11.20 percent earlier in the day.

The state debt agency cut its sale of Treasury bills by 10 billion forints, or $40 million, after bids from investors fell short of the planned 45 billion forints and the yield surged — a sign of the trouble Budapest may face in securing funds in months ahead.

“On the I.M.F. front, Fellegi’s comments are aimed at providing re-assurance, but I think the market will adopt a seeing is believing approach, given that market trust in this administration is now at rock bottom levels,” Timothy Ash at Royal Bank of Scotland said.

“They will want to see the ink and fine detail on any I.M.F. agreement,” he said, and expect the I.M.F. and European Commission “to negotiate hard with the Hungarian side.”

Talks broke down last month over a law curbing the independence of the central bank, but Mr. Orban has refused to withdraw the legislation, defying E.U. demands.

Despite recent concessions offered by Hungarian policy makers, many investors fear it will be very hard politically for the prime minister to change his policies in a significant way, boding ill for negotiations.

Janos Lazar, the parliamentary group leader of Orban’s Fidesz party told the news agency MTI on Thursday that Hungary needed the guarantees provided by an international agreement to be able to finance its debt, but would accept only such compromises and solutions that served its own interests.

“The servile behavior which characterized previous governments is not justified because the revenues and expenditures of this country broadly match,” Mr. Lazar was cited as saying. “If our debt was not this high, the country would stand on its feet in a stable way.”

He told MTI that Fidesz was ready to approve legal changes or pass new legislation proposed by the government within the context of the planned aid talks, which Budapest expects to start officially later this month.

But Mr. Lazar also reiterated criticism of the central bank, saying it was not doing enough to help boost growth and back the government’s policies with monetary tools, unlike in 2008 when it bought mortgage notes and bonds on the secondary market.

The government has repeatedly criticized the bank for interest rates it considers to be too high, and for not doing more to boost lending to the economy.

The bank’s key base rate stands at 7 percent now, but analysts said the bank could be forced to raise it further if the forint’s slide continues.

While most analysts believe Hungary’s government will back down and eventually sign an agreement with lenders, some say this could require a deeper market crisis first.

“Again we are seeing shifts to get negotiations started and calm the market, but still a lot of feet dragging, but we are nowhere near the place where Orban will be U-turning on policy,” Peter Attard Montalto at Nomura said.

Article source: http://www.nytimes.com/2012/01/06/business/global/hungary-pledges-to-seek-quick-deal-with-imf.html?partner=rss&emc=rss