EU sees Hungary's 2013 deficit overshooting target-report

Reuters Business News
Posted: Sep 07, 2012 1:48 PM
EU sees Hungary's 2013 deficit overshooting target-report

By Krisztina Than

BUDAPEST (Reuters) - The European Commission expects Hungary's 2013 budget deficit could be almost double the government's target, a website reported on Friday, as Prime Minister Viktor Orban continued to dismiss lenders' conditions for a financing backstop.

EU officials, in a letter about initial talks with Budapest last month on a financing agreement, said Budapest's growth projections were overly optimistic and its deficit could exceeder 4 percent of gross domestic product next year, website reported.

The letter, dated August 31, also called for Hungary to scrap a new transaction tax on its central bank as a condition of securing a backstop but did not mention proposals for pension cuts or a rise in income tax.

Daily newspaper Magyar Nemzet said on Thursday that the International Monetary Fund was demanding pension cuts and an income tax rise as a condition of a financing deal.

Orban said on Friday that Hungary needed an IMF/EU financing agreement but he reiterated that the lenders' initial set of policy proposals were unacceptable, adding to concerns in financial markets that credit talks will be long and potentially unsuccessful.

"I look at this (lenders' proposals) as a negotiating position, but I'd like to make it clear that on this basis there will not be a deal, these are such demands ... or proposals from the IMF/EU which Hungary cannot accept," Orban told public radio.

"So I think we need (an IMF agreement) ... there will be one, we will agree but not on this basis."

His government would work out "an alternative" negotiating position in the next 7-10 days, he said.

The Hungarian government began talks with the EU and the IMF last month but Orban has said that his government could not agree to any cuts in pension or family benefits.

On Thursday, in a video on his Facebook page, he said that lenders' list of conditions was "long" and referred to details of what he said the IMF was demanding, as published by the pro-government Magyar Nemzet.

However, the IMF, when asked about the report in Magyar Nemzet, said on Friday that "some reports in Hungarian media contained significant inaccuracies" concerning the contents of a note to Budapest from lenders in July.


The European Commission said it was now waiting for feedback from Hungary on a document that was provided by the EU and IMF at the end of July.

It was not immediately clear whether this was the same as the letter cited by Index.

"This is a negotiation process, we have made a proposal, it is now for the Hungarian government to come back to us," Commission spokesman Olivier Bailly told a briefing.

"We want to focus our discussions with the Hungarian authorities on the support for growth and jobs in Hungary and we think that the confidence of investors, in Europe and globally, require a solid and stable taxation system, without ad hoc changes," he added, in reference to a new tax on transactions.

The transactions tax, which is also levied on the central bank and has been criticized by the European Central Bank for hurting the bank's independence, is seen as a key sticking points in talks.

Orban said differences with lenders centered on the financing of the government's job protection plan, which the IMF and EU said could put a hole in the budget next year.

Some analysts said Orban, who faces an election in 2014, was trying to increase his domestic wiggle room, should he be pressed for a deal.

"On the one hand, there is a complex PR campaign going on domestically related to what can only be described as the beginnings of the 2014 re-election campaign," said Peter Attard Montalto at Nomura.

"The government is constructing a backup strategy in case it is ultimately forced to accept a backstop by trying to make it seem like it has got more from the IMF than it actually has."

But Montalto said the government would avoid a deal for as long as possible in the hope that it can either issue foreign currency debt, or stick with its existing financing buffers, which analysts said would last at least until the end of March.

The government forecasts a deficit of 2.2 percent of GDP next year, much smaller than the European Commission's estimate as quoted by Index.

(Reporting by Robin Emmott in Brussels, Krisztina Than in Budapest, editing by Patrick Graham and Susan Fenton)