July 18 (Bloomberg) -- Hungarian bonds and the currency may fall after the International Monetary Fund and European Union ended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit.
The Washington-based IMF, which is providing the bulk of a 20 billion-euro emergency loan to Hungary under a 2008 bailout agreement, said late yesterday that “a range of issues remain open.” The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said.
The forint has lost 6.5 percent against the euro in the past three months, the worst performance among the more than 170 currencies tracked by Bloomberg. The yield on the benchmark three-year government bond rose 153 basis points to 6.93 percent on July 16.
Orban won a landslide victory in April by pledging to end the budget cutting strategy of his predecessors, which helped reduce Hungary’s deficit to 3.8 percent of gross domestic product in 2008 from 9.3 percent in 2006. The shortfall widened to 4 percent last year and may reach 4.1 percent this year, according to the European Commission.
After the election, Fidesz said the previous administration lied about the budget as he lobbied the IMF and EU to allow wider deficits this year and next. Fidesz officials roiled markets on June 3 and 4, saying the economy was “much worse” than the government had forecast and the country had a “slim chance to avoid a Greek situation.”
We have just seen the beginning of the domino effect: the weakest links will fail first until the whole thing has unwound itself. It will take years, and it will be ugly for those who have not positioned themselves accordingly.