Hungary eyes budget cuts

By Krisztina Than and Marton Dunai

BUDAPEST (BestGrowthStock) – Hungary’s government vowed to cut spending on Monday as it strove to repair damage from officials’ comments last week about a possible Greece-style debt crisis, but a lack of policy detail kept markets on edge.

Last week’s policy stumbles by the new government rocked Hungarian assets and rattled markets around the globe which were already hyper-sensitive to sovereign debt risk.

The forint bounced off a one-year low and bond prices rose late on Monday, suggesting investors’ nerves had been soothed to an extent by promises to cut the deficit although economists said details of the government’s plans were still lacking.

The cabinet has promised an action plan by early Tuesday at the latest.

Economy Minister Gyorgy Matolcsy said the center-right Fidesz government, in office since May 29, would stick to a budget deficit target of 3.8 percent of GDP and would need to cut spending by 1.0-1.5 percent of gross domestic product.

But he also said the government could introduce a flat personal income tax for families, lower than current rates — hard to square with commitments agreed under a 20 billion euro bailout from the European Union and International Monetary Fund.

Moody’s credit rating agency said the government’s willingness to consider unorthodox measures to boost tax revenue was cause for concern, while other analysts said Fidesz was still sending mixed messages, a practice which prompted a currency, stock and bond selloff last week.

“We’ll stick to our 3.8 percent budget deficit level for this year. It was agreed by the IMF and the EU and it was also agreed by the Hungarian government so there is no doubt about that, we’ll stick to that figure,” Matolcsy told CNBC.

He admitted to communication blunders when officials suggested Budapest could slide toward a similar fate as Athens, but added “it is blatant that Hungary is not Greece.”

Economists said the government appeared to be saying different things to international and domestic audiences, while new statements were confusing after Fidesz earlier said this year’s budget deficit could be as high as 7 percent of GDP.

“One cannot help being puzzled when Hungarian officials talk about a much larger than planned budget deficit and at the same time rule out austerity measures and instead promise tax cuts,” said Danske Bank analyst Lars Christensen.

Luxembourg’s Jean-Claude Juncker, chairing a meeting of euro zone finance ministers said: “I do not see any problem at all with Hungary. I only see the problem that politicians from Hungary talk too much.


Fidesz roared to victory in the April election, eclipsing the former ruling Socialist party whose profligacy in their first four years of power between 2002-2006 helped lead the country into fiscal trouble and triggered austerity measures.

Most economists say Hungary is in a much stronger position than Greece. Its deficit and debt ratios to GDP are not nearly as high; public debt was about 80 percent last year, compared with 133 percent projected for Greece this year.

But Moody’s said the government’s statements and its ideas on how to boost growth brought new attention to Hungary’s still high public and external debt.

Citing unnamed sources, online portal Index reported the government was considering levying a special tax on banks and channeling private pension funds to the state system as a way to boost revenues.

Matolcsy told domestic viewers on TV2 television ministers were examining a 15-20 percent flat tax for families, while State Secretary Mihaly Varga said the government had made no decision on a bank tax and had not discussed the pension system.

He said the government would hold official talks with the IMF and EU only in August, adding it had looked at financial institutions, banks, insurers, and leasing firms and was considering “what help, it could get from them.”

“If the government decides on this issue — and I stress that no decision has been made — then certainly we will work out the details sitting down with the parties,” Varga said.


The doubts over Hungary had helped push the euro to a four-year low and temporarily pushed oil 3 percent lower under the psychological $70 level.

In Romania, the government canceled the third bond sale this month after investors spooked by fears of a fiscal crisis in neighboring Hungary and worries over domestic reforms sought yields Bucharest was unwilling to pay.

But in a hesitant vote of confidence on officials’ pledge to stick to the budget target, the forint had jumped 1.2 percent from Friday’s local close by 1413 GMT and the cost of insuring Hungary’s debt against default fell sharply, wiping out some of the gains to 13-month highs made last week.

The bank tax talk had helped send shares tumbling 5 percent on the Budapest bourse, which briefly suspended trading in leading lender OTP Bank after its shares shed 10 percent. In line with other market moves, its shares later clawed back to trade flat on the day.

Analysts rued the lack of a clear fiscal framework and said it would take months for Budapest to win back market trust.

Details from the government’s plans are still lacking, and investors will watch the action plan which the cabinet promised by early Tuesday, very closely.

“They will at the very least want specific details of how the Hungarian government will seek to comply with promises to EU and IMF and stabilize the debt ratio,” UBS researchers said.

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(Reporting by Krisztina Than and Marton Dunai; writing by Michael Winfrey; Editing by Mike Peacock)

Hungary eyes budget cuts