Hungary, Trying to Calm Markets, Works on Economic Plan to Boost Credibility

By GORDON FAIRCLOUGH

BUDAPEST—Hungary's new cabinet huddled in an emergency session over the weekend to devise an economic plan aimed at restoring confidence in the nation's creditworthiness, as the government backtracked on officials' earlier comments that the country could default on its debts.

Mihály Varga, a senior official who acts as the prime minister's chief of staff, vowed that Hungary would stick to strict government-spending limits set in the country's agreements with the International Monetary Fund and the European Union. He said Hungary wasn't at any risk of default.


European Pressphoto Agency

Prime Minister Orbán visits flooded areas outside Budapest on Friday.
."The government aspires to regain credibility," Mr. Varga said Saturday at a news conference called after remarks by other politicians about the state of Hungarian finances spooked investors, causing the Hungarian currency to plunge in value and dragging down the euro. In early Asian trading Monday, the euro weakened further.

The government said it would formulate its action plan by Monday, when it is expected to brief visiting officials from the IMF and EU. It was unclear exactly when details would be announced to the public.

Friday's punishing market reaction showed how little tolerance investors have for any move away from budget austerity in the wake of the Greek crisis. It was followed by phone calls from European officials warning that Hungary needed to get its fiscal house in order, people familiar with the situation said.

The combination appeared to have prompted a sharp reversal — in rhetoric, at least — by the government, which came to power after the right-leaning Fidesz party won a lopsided victory in April elections after a populist campaign calling, among other things, for tax cuts.

Prime Minister Viktor Orbán's press aide, whose comments that Hungary could miss its deficit-reduction targets and would need to work to avoid following in Greece's footsteps sent markets reeling Friday, made an about-face Sunday. He said the administration would cut government bureaucracy and aim to stay within the IMF's budget restrictions.

"The government has created an artificial crisis," said Tibor Szanyi, a long-serving member of parliament from the opposition Socialists who represents a Budapest constituency. "They wanted to exaggerate the situation" for political ends, Mr. Szanyi said. "It is really dangerous to do that in the heart of Europe."

Politicians and analysts in Budapest said recent pessimistic comments by Fidesz party officials may have had a dual political objective: first, to test the waters and see if lenders would permit more relaxed fiscal policies. And, if not, to provide an excuse to back away from campaign promises and stick to tight budget limits.

In 2008, the Hungarian government, burdened with heavy debt, was unable to borrow in capital markets amid the global credit crunch. It turned to the IMF and EU for a bailout, and agreed to stringent limits on government spending. Under the deal, this year's budget-deficit target was set at 3.8% of gross domestic product.

In April, after the Fidesz party victory, Mr. Orbán, who is now prime minister, said Hungary would take a tough stance in trying to negotiate new terms with the IMF and EU. "We won't listen to dictates but aim to have an economic program which wins them over as our partners," he said at the time.

In the months that followed, Mr. Orbán's Fidesz party has made repeated accusations that the previous government understated the likely size of this year's budget deficit and that undisclosed fiscal skeletons lurked in the closet. Some hinted the deficit could end up being as large as 7% or 7.5% of GDP.

One international official familiar with the government's budget situation and with its dealings with the IMF and EU said such figures are "completely misleading." The official said that if Mr. Orban doesn't take some steps to rein in costs, the deficit could be slightly above 3.8% of GDP, "but nothing dramatic." The official added that "so far there is nothing to back the previous statements" about a ballooning deficit, and the program with the IMF and EU "is so far on track."

.Péter Oszkó, who served as finance minister until the end of May as part of a government of technocrats charged in large part with implementing austerity programs, dismissed the Fidesz deficit comments as a "planned political tactic" and said the previous government had been completely transparent about the budget situation.

When it handed power to Mr. Orbán's administration, the departing government predicted that the 2010 deficit could rise a bit over 4% unless cuts were made to unemployment programs that had grown faster than expected. The central bank independently forecast a deficit of 4.5% if the government makes no additional cuts. That is a far cry from the situation in Greece, where the government budget deficit was 13.6% of GDP last year.

Since 2008, Hungary has made considerable progress in curbing government spending. It has cut back on pensions, raised the retirement age, frozen wages for government employees and pared various government subsidy programs. It hasn't needed to draw any funds from its IMF and EU credit facilities this year, despite being qualified to do so.

Mr. Oszkó said he called the government on Friday morning to warn them that talk of potential defaults and comparing Hungary to Greece was extremely dangerous. But he said officials remained confident. "They didn't realize that they were in trouble," he said. "They caused such a mess that they put the whole euro zone in trouble."

Between the April election and the new government's installation in office a little over a week ago, however, markets seemed to largely shrug off Fidesz officials' bearish comments. That changed last Thursday.

Bearish comments Thursday by a Fidesz party vice president, speaking to a local audience outside Budapest, were reported by Hungarian media and then picked up by international outlets. That kicked off a drop in the Hungarian forint and sent the price of Hungary's credit-default swaps—an indicator of the risk of investing in a country's assets—soaring.

The trouble worsened Friday, after Mr. Orbán's spokesman, Péter Szijjártó, failed to contradict the party official's assessment, and predicted a wider-than-hoped-for deficit. On Friday, as the forint continued its plunge, fears spread, pulling the euro to a new four-year low in late trading in New York and prompting the Czech and Polish currencies to lose ground as well.

—Margit Feher
and Veronika Gulyas
contributed to this article.
Write to Gordon Fairclough at gordon.fairclough@wsj.com