EU Urges Hungary to Slash Huge Budget Deficit

(Reuters) The European Commission on Thursday urged Hungary to cut its budget deficit faster, even as government officials reiterated the 2010 fiscal gap may reach almost twice the target agreed with lenders including the EU.

The new center-right government, which had promised tax cuts to boost growth, has warned in the past few weeks that the deficit could be much higher than the agreed target of 3.8 percent of GDP, blaming “fiscal skeletons” left by the previous Socialist administration.

A top government official again said on Thursday that the deficit could be 7.0 to 7.5 percent.

The vice chairman of the ruling Fidesz party, Lajos Kosa, said the government would launch a crisis management plan soon.

Public finances were in much worse shape than previously expected and there was only a slim chance of avoiding a Greek-style scenario, news portal cited him as saying.

Analysts, who on average project a deficit of around 5 percent this year, said suggestions Hungary’s state of finances were comparable to Greece were misleading and wrong.

“We maintain our view that budget deficit can be around 5 percent of GDP in this year and around 4 percent in 2011, but it doesn’t mean that Hungary is close to bankruptcy,” said David Nemeth at ING.

“Overall, Hungarian newsflow is quite concerning and even if the negative rhetoric is ‘just politics’ we advise that more bad news might well be in the pipeline. The comparison with Greece might be ‘overdone’, but one can hardly say that public finances are in good shape in Hungary,” Danske Bank added in a note.

While there were risks in the budget and the target could be missed without supplementary measures, the government needed to be wary of rhetorical excess at a time of market nervousness over the euro zone’s debt problems, analysts said.

The forint fell 2.6 percent versus the euro after Kosa’s comments while bond yields jumped up to 30 basis points.

The European Commission warned Hungary on Thursday against losing the confidence of financial markets.

Speaking after talks with Hungarian Prime Minister Viktor Orban, Commission President Jose Manuel Barroso said: “The message to Hungary … is to accelerate fiscal consolidation, not to reduce it. To go against fiscal consolidation in Europe today would be a disaster.

“Hungary is in a very delicate situation, so no complacency.”

A run on its currency after the financial crisis erupted in 2008 forced Budapest to seek a $25 billion rescue from the EU and IMF to avoid economic collapse.

Orban said he would keep the budget deficit under control but declined to give any details. He said his government needed to verify figures left by the previous administration.

“No matter what those figures will show us, I told … Mr. Barroso that within 72 hours I will have an action plan in terms of short-term … and other changes that will ensure the rise of the competitiveness of the country,” Orban said.

Orban’s government has not yet provided clear direction on tax cuts or other aspects of fiscal policy, or on how it plans to boost employment after last year’s recession when the economy shrank 6.3 percent. It is seen growing modestly in 2010.

The central bank said on Wednesday the deficit could be 4.5 percent of GDP or 4.3 percent if the government freezes remaining budget reserves.

Analysts said it was also possible Fidesz was trying to back out from its earlier tax cut pledges by projecting a crisis scenario.

“So the question is that Fidesz has a only bad communication technique or they have no idea what to do,” Nemeth said.

“In the case of the former … it would mean that they want to introduce a really tight fiscal policy… and they want simply to back out of their promises and they want to cool down slightly the overheated expectations.”

Analysts said the new government needed to act fast to reassure nervous financial markets.

“The government needs to move quickly to restore market confidence, and prevent the sell-off getting out of hand. It needs to be entirely transparent in terms of its reform plans going forward, and the state of play with respect to the IMF/EU program,” said Timothy Ash at Royal Bank of Scotland.


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