The Next Leg Of Eurocrisis 2010? The Hungary Wolfpack Cometh As IMF, EU Cancel $25 Billion Rescue Loan Access

In the most surprising news of the weekend (so far), the IMF and the EU effectively suspended Hungary's access to the remaining funds in a $25 billion rescue loan package created in 2008 to prevent a financial meltdown of the country. The timing of this development is most extraordinary, as only a month ago Hungary served as ground zero for yet another scare that pushed European sovereign bond spreads to new records. The reason given for this dramatic, and very destabilizing action is that the nation must "take tough action to meet targets for cutting its budget deficit." Ostensibly  Greece continuing to lie about its own economic deterioration is a necessary and sufficient condition for escalating IMF lauding. Yet, with Europe set to announce results of its Stress Test kabuki next week, the last thing the continent needs is a real liquidity crisis (or the threat thereof) to counteract the smooth talking bureaucrats dead set into hypnotizing the union into "all is well" submission ("and when I snap my fingers, the debt-to-GDP ratio will be back to 10%"). To quote Portfolio.hu: "Brace yourself for Monday, folks!"

Reuters is on the case:

Negotiations with the lenders had been expected to finish early next week. Analysts said the forint currency could fall sharply when financial markets reopen Monday due to uncertainty over the international safety net for Hungary, which has financed itself from the markets since last year.

"In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced -- 3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011 -- remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives," the IMF said.

Hungary's politicians proves once again they are complete dilletantes when it comes to dealing with entrenched status quoers as the IMF - instead of taking Greece's lead and promising they would not only cut pension to zero, but demand the citizens pay for the privilege for working for the government (a stance, which of course will be repealed in 364 days, but by then, the myth goes, the Keynesian ponzi will be back in full swing), Hungary's new political party apparently had the temerity of telling the IMF it can shove its demands.

Hungary's new center-right government, which swept to power in April elections, has said it wanted to extend its current financing deal with lenders until the end of 2010 and seek a precautionary deal for 2011 and 2012.

Economy Minister Gyorgy Matolcsy made clear the government was keen to resume negotiations. "The government will of course continue talks with international organizations including the IMF and the EU," he said in a statement published by the national news agency MTI Saturday.

Christoph Rosenberg, who led the IMF delegation to Hungary, signaled that the Fund wanted more on next year's budget. "By definition when we come next time -- unless we come next week -- the government will have made more progress on the 2011 budget and that will be a very important budget," he told Reuters.

In an interview, he also said the IMF had not discussed the possibility of a new financing deal for 2011 and 2012.

"We are aware of what has been said in public but in our meetings we didn't really get to that point, because we obviously needed to first resolve the policy issues and those have not been resolved," he said.

One thing is certain: the next Hungarian bond auction will fail, as will the HUF on Monday. Look for a plunge in the currency (and a surge in Hungarian, and by implication Romanian and Bulgarian, CDS) when the market opens Monday.

"If we do not have the safety net of international lenders, that hits us where it hurts most," said MKB Bank analyst Zsolt Kondrat.

"One would definitely expect a weakening forint Monday. A 10-forint weakening (versus the euro) is quite plausible, and nobody knows how nervous the market's reaction might be."

And for the version straight from the horse's mouth, here is the non-hyperbolized perspective straight from portfolio.hu

Although Hungary, seeking to secure a precautionary loan deal with the International Monetary Fund, was to continue discussions with officials of the IMF and the European Union on Monday, the mission from the Washington-based lender decided to return home. The EU also postponed the conclusion of the review of the country’s EUR 20 billion credit facility granted in the autumn of 2008. The reason is that "a range of issues remain open" and the cabinet that will need to provide clarification for these. Brace yourself for Monday, folks!

That’s it, we’re leaving!

An IMF mission, led by Christoph Rosenberg, held discussions with the Hungarian authorities during July 6-17, as part of the sixth and seventh reviews of the country’s Stand-By Arrangement (SBA) approved on 6 November, 2008.

While there was "much common ground" between the negotiating parties, the IMF has announced that its mission decided to return to Washington D.C., as "a range of issues remain open". It said it would seek to bridge these differences.

European Commission officials, in close cooperation with IMF staff, conducted their fifth review mission under the EU balance of payments assistance to Hungary in the aforementioned period. They, however, said there were "a number of open questions on which the government would need more time to provide clarification." The EU executive decided to postpone the conclusion of the review and that "it would be appropriate to return for further discussions at a later stage."

The parties were to hold a joint press conference on Monday, provided they come to terms about a few issues. They have not, so the IMF stood up and left and the EU did not conclude its review.

Rate meeting ahead

The early departure of the missions mean Hungary cannot draw the next tranche of the credit facility, although the country had no intention to do so therefore it will have no impact on the budget. But the break in the talks is likely to lead to forint weakening and a rise in government securities yields on Monday, i.e. the financing of the state will become more expensive.

The morning market reactions will be especially crucial as the central bank’s (NBH) Monetary Council will hold a rate setting meeting that day. According to the consensus forecast of analysts in a Portfolio.hu poll, the MPC will keep the base rate on hold at 5.25%. But a sharp HUF depreciation and a rise in Hungarian CDS (Credit Default Swap) spreads might convince the MPC to hike rates. This, of course, will not help boost lending and economic growth.

Brace yourselves for Monday indeed.

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