Hungary's government on Wednesday ruled out signing a new financing deal with the International Monetary Fund, triggering renewed forint weakness and uncertainty about the country's fiscal outlook.
Officials had excited markets with comments late on Tuesday promising to renew talks with the Fund this autumn, the latest in a series of mixed messages to come from Budapest on its finances since a new government took power in May.
The Economy Ministry said in a statement on Wednesday that Hungary does not need a new financing deal with the IMF and the talks with the Fund would be only about a regular country review during consultations which the Fund conducts with all states.
Even though Hungary has not drawn on any fresh funds from its existing IMF/EU loan since last year, securing a new safety net type deal had been seen by many market players as a guarantee of fiscal probity from the new administration. Markets have refrained from punishing the centre-right Fidesz government ahead of October local elections, hoping it would reverse its opposition to more IMF aid. Talks with lenders about a review of Hungary's current deal, which runs out in October, unexpectedly collapsed in July.
The forint dropped 0.6 percent to 284.30 versus the euro after the ministry's statement ruling out a new deal, while government bond yields rose about 10 basis points.
A Ministry press official had said on Tuesday that Budapest would resume talks with the IMF in the autumn and "the sides will reach an agreement". The aid from the Fund and the European Union was vital in staving off a full-blown currency and debt crisis after the collapse of US investment bank Lehman Brothers deepened global financial turmoil in 2008.
But the ruling Fidesz party is seeking more leeway on policy than the deal with the Fund allows. It has pledged to meet an IMF deficit target of 3.8 percent of GDP this year, but has signalled it did not intend to bring the deficit below 3 percent next year even though Hungary is obliged to do so under the EU's Excessive Deficit Procedure (EDP).
Prime Minister Viktor Orban said last month that Hungary's economy must be financed from the market as it wanted to regain economic sovereignty, and the government has already secured the bulk of the funding it needs for this year. Lajos Kosa, vice chairman of Fidesz, said earlier on Wednesday that Hungary would negotiate with the EU about an economic and fiscal track which would be acceptable for Hungary.
"It seems that yesterday's comment from the Economic Ministry... does not mean that talks about a 2nd programme will resume. It is not very clear what they want," said Gyorgy Barcza at K&H Bank. Fidesz faces municipal elections on October 3, and most analysts have said it was unlikely to lay out its 2011 budget plans ahead of the vote fearing it might lose some of its still strong public support.
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