Budapest to symbolically shut down IMF office

Budapest Danube Picnik.jpg

Hungary plans to pay back its IMF loan early and called on the fund to shut its Budapest office in what could be a symbolic move by Prime Minister Viktor Orbán’s government to display its economic sovereignty.

Hungary's ability to avoid the austerity programmes faced by many of its European neighbours will be the government's main selling point when it bids for re-election next year.

In a letter to International Monetary Fund Managing Director Christine Lagarde on Monday (15 July), central bank chief György Matolcsy said Hungary was considering an early repayment of outstanding sums owed on the 2008 loan.

Central Europe's most indebted nation was pulled back from the brink of bankruptcy with a 20 billion euro rescue package from the IMF and the European Union amid the global crisis.

Shortly after taking office in 2010, Orbán abruptly ended that programme as the government sought to control the country's financial affairs on its own. It initiated an unorthodox campaign that included Europe's highest bank tax and special levies on business.

Relations between the two sides have been tetchy since then, with Orbán's populist government bolstering market confidence for about a year with the promise of a new IMF safety net, while running an anti-IMF campaign in local media.

By issuing the country's first international bond since 2011 in February, Orbán demonstrated he could go it alone by borrowing on global financial markets.

Central bank chief Matolcsy, Orbán's former economy minister, said he would initiate closure of the IMF's resident representative office in Budapest, saying it was "not necessary to maintain" any longer.

The IMF's representative in Hungary, Iryna Ivaschenko, could not immediately comment.

Based on a summary by the country's debt agency, Hungary had been due to repay the equivalent of €913 million to the IMF in each of the third and fourth quarters and another €299 million in the first quarter of 2014, an election year.

In the letter to the IMF, Matolcsy highlighted the pro-growth stance of the central bank, which has slashed interest rates to a record low of 4.25% over the past 11 months.

"Let me use this opportunity to personally congratulate you for your efforts in making the most of the Fund's mandate… to promote economic growth," Matolcsy wrote to Lagarde.

"Let me assure you that at the Magyar Nemzeti Bank, the central bank of Hungary, we put equal emphasis on this goal, in line with our legal mandate." 

Faced with a mounting debt problem, the centre-right ruling party Fidesz has pledged to cut the country's budget deficit below 3% of GDP in 2011, making it appear as a top performer in the EU.

But the methods used to achieve this goal have stirred controversy inside the country and now also at European level.

To get the budget within EU limits in 2011, the government is relying on unorthodox, one-off revenues, making markets fearful the

fiscal gap will bulge again after 2012 unless more durable measures are introduced.

Bank taxes, "special taxes", "temporary taxes", nationalisation of private pension funds and levies on foreign businesses are all seen with growing scepticism by both public opinion and financial markets.

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