UBS analysts see very strong pressure weighing on the cabinet to keep the budget deficit below 3% of GDP in 2011, in view of the fact that Hungary has been under an EU excessive deficit procedure since 2004.

The continuation of that status would have serious negative consequences, they add.

More than €8 billion of Hungary’s foreign and domestic debt will mature in the next two years. “Under these circumstances, the global refinancing environment will have to remain very, very supportive if Hungary is to do without the IMF,” UBS adds.

If the environment changes, there will be substantial pressure on the cabinet from credit-rating agencies in the form of possible downgrades, UBS continues, adding that it would be wise to sit down with the IMF and EU to agree on a precautionary line of credit.

JP Morgan believes the EU will insist that Hungary continue co-operation with the IMF, although the government at this point claims it does not need the IMF.

Timothy Ash, head of emerging-market research at the Royal Bank of Scotland, argues that rating agencies will be patient with the government only until the October 3 elections.

“If Hungary does not commit to the IMF-EU programme, or there is no detailed medium-term fiscal plan, then Hungary could be downgraded, even to junk status,” he warned.

Takarekbank’s Gergely Suppan also said credit-rating agencies would like to see a detailed fiscal roadmap for the 2011 budget. An agreement with the IMF would only improve this picture, he added.

In a similar vein, K&H Bank senior analyst Gyorgy Barcza said credit-rating agencies might change their negative attitude toward Hungary, if they see the government’s 2011 budget target figures in writing."

Source: Hungary Around the Clock.

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