EU, Hungarian officials end talks amid disagreement over austerity measures

Forint slides after EU, IMF suspend Hungary talks

BRUSSELS — Hungary’s currency slid against the euro on Monday after the European Union and the International Monetary Fund broke off talks on the country’s bailout package, demanding bigger spending cuts.

Hungary must meet strict targets to reduce debt in return for a €20 billion ($26 billion) loan from the European Union, the IMF and the World Bank that it received in 2008.

The EU and the IMF said Saturday that Hungary isn’t doing enough to slash spending or make long-term reforms to its economy — and that they would suspend talks to give the government more time to resolve “a number of open questions.”

Markets reacted by sending the Hungarian forint to its lowest point against the euro since early June, trading at 290 forints on Monday from 282 on Friday.

EU and Hungarian officials played down the impact of suspension on Monday, with the European Commission saying there would be “no direct, immediate consequences” for the country.

Hungary’s economy minister Gyorgy Matolcsy told CNBC that talks would resume in September.

He also said that the stability of Hungary’s economy was not threatened by the delay and that “some uncertainty” in financial markets could remain until Thursday when parliament will vote on part of the government’s economic plans, Hungarian state news agency MTI quoted him as saying Monday in Vienna.

Analysts saw no long-term worries over the bailout package — but warned of short-term ructions and a “weaker and more volatile forint” until the government firms up its budget cuts.

“In the meantime, concerns over the prospects for the new program and lack of flexibility on the government’s side are likely to have negative impact on the Hungarian assets,” said Magdalena Polan, an economist at Goldman Sachs.

Hungary’s ruling party Fidesz faces municipal elections on Oct. 3 and is reluctant to tighten austerity measures that have already become too much for the country to stomach.

Under pressure from the EU and international lenders, the country has been trying to curb spending for the last four years after former prime minister Ferenc Gyurcsany admitted that the country’s officials lied about the state of the economy to gain entry to the EU in 2004.

The 2008 financial crisis hit the country particularly hard because many homeowners had taken out loans in foreign currencies at much lower interest rates — mainly the euro and the Swiss franc. Monthly repayments surged when the forint fell, leading to fears of soaring defaults.

Hungary says it has made all the cutbacks required to reduce its deficit to 3.8 percent of gross domestic product this year.

But the EU says that isn’t enough and that it needs to take “tough decisions, notably on spending” to bring the budget gap — the difference between what a government spends and receives — under the EU limit of 3 percent by next year.

It also criticized a two-year temporary levy on banks aimed at raising $916 million that it says could cause “a significantly negative impact on the country’s investment climate and economic growth.”

It also called on Hungary to respect its central bank’s independence, push through delayed reforms to transport and health spending and to review several draft laws that “are considered to be distortive and potentially not in compliance with EU law.”

There are worries that Hungary’s finances could be worse than stated. The government has strongly denied comments by officials that the deficit could reach 7.5 percent of GDP and is close to defaulting on its debt.

Despite the news from Hungary — and a credit rating downgrade of Ireland by Moody’s agency on Monday — investors did not seem to worry that Europe’s debt crisis would worsen. The 16-nation currency bought $1.2962 in Monday morning European trading, up from $1.2947 in New York late Friday.