Hungary says viszlat to the IMF

Hungary says viszlat to the IMF

Published: July 17, 2013

The Hungarian government has requested the closure of the IMF’s office in Budapest following a decision to repay US$2.125bn in outstanding loans early. Although not surprising given the expiration of a funding package, a political motive cannot be ruled out. Rod James reports on developments.

The Hungarian government has requested the closure of the IMF’s office in Budapest. The move was announced on Monday in a letter sent by Hungarian central bank president Gyorgy Matolcsy to Christine Lagarde, the fund’s managing director.

While expressing appreciation for the work the IMF has done, Matolcsy asked that its Hungary office be closed because it is “not necessary to maintain it any longer”. This is in light of Hungary’s proposed early repayment of US$2.125bn of borrowing from the IMF, the remnants of a US$25.5bn credit facility offered to the country in 2008.

In response to the letter, the IMF said: “As Ms. Iryna Ivaschenko’s posting as resident representative in Hungary was due to end in late August and the IMF’s presence in member countries is at the invitation of country authorities, the IMF will not seek to replace her. The IMF looks forward to continued cooperation with Hungary in the context of regular bilateral consultations as with other member countries.”

Hungary’s decision to ask for the IMF’s withdrawal isn’t a complete surprise. If there is no loan programme in place, an on-the-ground presence isn’t strictly necessary. Half-hearted negotiations have been ongoing over a new US$19bn IMF loan for more than a year but the government has raised objections to many of the conditions, including the need to implement pension cuts and revoke a banking tax. 

The decline in developed market yields and consequent push East by investors in search of returns allowed Hungary to raise US$3.25bn in February, giving the government the confidence to push ahead without an IMF agreement. Although funding is not likely to be as easy to come by now, as the withdrawal of quantitative easing gathers pace, Zoltan Torok, an analyst at Raiffeisen Bank, believes it is unlikely that the country will be completely frozen out of the markets.  

“If you look back over the last few years, only once did a situation occur when there seemed to be difficulties in getting any financing at all,” he says. “It was in 2011 when the Spanish and Italian problems erupted. Then Hungary’s tactic was to give the message to the market that it would turn to the IMF to secure another programme. There were some timid early-stage negotiations but nothing happened. In the meantime the general market environment improved significantly. I don’t think there is a real danger that financing will become impossible.”

The fact that general elections are due next year suggests that there is more to Hungary’s decision than meets the eye. The ruling centre-right Fidesz party counts on the support of the far-right Jobbik, many of whose members view IMF involvement as an attack on Hungary’s economic sovereignty.

“I think the government’s decision [to close the IMF office] serves several purposes,” says Torok. “One reading of the move is that it will be a plus point in the election campaign that under the [Victor] Orban government, Hungary terminated its relations with the IMF and as a symbolic action there is no longer an office.”