Gesprekken over begrotingshulp mislukken tussen Hongarije, EU en IMF (en)
EUOBSERVER / BRUSSELS - EU and IMF i negotiators abandoned talks on the weekend with Hungary's government over its plans to rein in its budget deficit, bluntly saying Prime Minister Victor Orban's strategy was inadequate, a move that is likely to set off panic in the markets and see the forint and Hungarian bonds take a steep dive.
In what analysts are nearly unanimously calling a "very rare" development, the International Monetary fund and the European Union abruptly called off their review of Budapest's €20 billion bail-out, originally agreed in 2008.
Without a successful conclusion to the review, further funds cannot be dispersed.
Both overseeing bodies said Hungary had achieved "good progress" in terms of fiscal consolidation - the country has one of the lowest budget deficits in the EU - but this was not enough
"More remains to be done to cement these gains and put Hungary on a strong and sustainable growth path," the international lender said in a statement that to untrained eyes appears as politely bland as any other institutional communique but to investors is a red flag.
"Additional measures will need to be taken to achieve these objectives," it repeated.
The development is intended as a warning to centre-right leader Victor Orban, who campaigned to the left of the ruling Socialists, promising a lightening of the draconian austerity measures imposed by his predecessors, which had cut the country's deficit from 9.3 percent of GDP in 2006 to 3.8 percent two years later but had drained almost all popular support from the governing centre-left.
Taking a page out of the Greek government's playbook, Mr Oban immediately after winning the election said that the country's economic and fiscal situation was much worse than the previous government's pronouncements had suggested and announced that he would indeed have to impose stringent austerity measures of his own.
However, the prime minister's negotiating team still tried to limit the fall-out by asking the EU-IMF team for some leeway in 2011 after agreeing to abide by this year's 3.8 percent of GDP goal.
But this was judged insufficient,
"Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU. I welcome the authorities' commitment to the 2010 deficit target," said EU economy commissioner Olli Rehn i, after his team walked away from talks. "However, the correction of the excessive deficit by next year will require tough decisions, notably on spending."
The EU-IMF pair also warned that balancing the country's accounts can only done by cutting public services and privatisation. The other option available, raising taxes on corporations or the wealthy is out of the question, as, they argue, this threatens investment and growth.
Mr Orban had intended to raise some half a billion euros (187 billion forints) via a new tax on banks and insurance firms. The IMF however said this ""is likely to adversely affect lending and growth."
More subtlely, the EU's Mr Rehn said: "Care will also be needed to ensure a stable environment for both domestic and international investors."
Brussels and the IMF will be hoping a swift sharp spanking from the markets will chasten Mr Orban's government, but the move will also unnerve investor thinking about the condition of economies across the bloc, particularly in eastern Europe.
Markets had calmed somewhat in recent months and begun to train their eyes on state and local spending in the United States after months of speculation about the state of European countries' sovereign debt, but worries are likely to return if the assumption that the EU and IMF will automatically ride to the rescue of any failing economy is undermined.
The worry is that not just the forint, but the Polish zloty and other eastern currencies could witness some collateral damage resulting from the EU-IMF action.
Both Brussels and Washington also appear oblivious to any possible political fall-out. Jobbik, Hungary's far-right party with its own paramilitary wing, won 17 percent in recent elections, up from single digit support two years ago - largely a result of the economic crisis and the imposition of austerity by the Socialists.
After the election, political analysts warned that if Mr Orban's conservative Fidesz party was unable to convince the IMF and Brussels of the need for some leeway, Jobbik would be "waiting in the wings" to pick up the pieces.
The openly anti-gypsy and anti-semitic but also anti-capitalist Jobbik offered its own advice following the EU-IMF move.
"The choreography is expected Monday that will follow will take the following steps: politicians, analysts and journalists serving the global financial powers will lay into the government for not worshipping foreign pressure," the party's deputy parliamentary group leader, Tamas Hegedus, said in a statement, describing such critics as "collaborators".
"However, to draw attention: a radical, that is a radical change, the actual recovery of sovereignty can only be expected if we do not stop halfway with what has happened over the past twenty years, presenting a blind alley of economic model, but move toward a real paradigm shift in economic policy."
Local elections are scheduled for October.