Hungarian Government, Opposition Clash Over Crisis Measures

By Zoltan Simon

Oct. 18 (Bloomberg) -- Hungary's government and opposition failed to reach an agreement on measures to stem a crisis that battered local markets and forced the country to seek help from the International Monetary Fund and European Central Bank.

In a ``national summit'' called by Prime Minister Ferenc Gyurcsany, the government and central bank urged cutting the budget deficit faster than previously planned to stabilize financial markets, while the opposition, which is more popular than the ruling Socialist Party, called for reducing taxes to accelerate growth.

The global financial crisis is hitting more vulnerable emerging markets as investors shunned riskier assets in a flight to safety. Hungary's stocks, bonds and currency plunged this week, Fitch Ratings and Standard & Poor's cut the outlook on the country's debt, while the government was forced to lower its economic growth forecast for next year.

``The risk appetite of investors has fallen dramatically,'' Magyar Nemzeti Bank President Andras Simor said at the meeting. ``Any tax cuts must be preceded by a sustained reduction of spending.''

Narrowing the deficit is the government's ``most important task,'' Finance Minister Janos Veres said today. This year's shortfall will be 3.4 percent of gross domestic product ``at most'' and the government can ``hopefully'' undershoot that, Gyurcsany said.

Deficit Target

The government cut this year's deficit target to 3.4 percent from an earlier plan of 3.8 percent, reducing the 2009 goal to 2.9 percent from 3.2 percent.

The level of foreign currency borrowing by Hungarian businesses and consumers, the outlook for growth and a wider budget deficit than elsewhere in the region make Hungary's economy vulnerable, economists have said.

The benchmark BUX stock index fell 11 percent this week to a four-year low, while the forint dropped to a two-year low before recovering to 267.54 per euro. The currency has lost 10.5 percent this month. OTP Bank Nyrt., the nation's largest lender, fell 12.5 this week to a four-year low.

The ECB this week agreed to lend as much as 5 billion euros ($6.7 billion) to help unfreeze the local government bond market. Hungary also lined up potential financing from the IMF. The central bank started buying back government bonds and the country scaled by debt sales.

Ratings Outlook

Fitch yesterday cut the outlook on Hungary's credit ratings after Standard & Poor's on Oct. 15 put them on revision for a possible downgrade, citing ``sharply higher financial costs and reduced access to international markets'' for local banks. The country's debt is rated BBB+, the third-lowest investment grade, by both companies.

At today's meeting, Gyurcsany pledged to postpone tax cuts until economic growth rebounds from a planned 1.2 percent of gross domestic product next year. The government lowered its growth forecast from 3 percent.

Viktor Orban, chairman of the largest opposition party Fidesz, rejected the proposals by the government and the central bank to raise revenue to cut the deficit instead of funding tax cuts. The proposals amount to a ``new austerity package'' and would further stifle growth after the economy expanded 1.1 percent last year, he said.

Fidesz had 44 percent support last month, compared with 19 percent for Gyurcsany's Socialists, according to a poll by Median. The results have a margin of error of between 1 percent and 5 percent.

The government is expected to pass next year's budget in December with support from the smaller opposition Free Democrats' Alliance, which quit a government coalition in May, leaving Gyurcsany's Socialists in a parliamentary minority. The Free Democrats agreed to give up their demand for next year's tax cuts to cut the deficit.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net