Economy 30 January 2013, 12:34pm

IMF says 'no' to flexible credit line for Hungary - Orbán

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Hungary asked the International Monetary Fund for a flexible credit line but was refused, Prime Minister Viktor Orbán said in Brussels on Wednesday. The PM held a lecture at the Bruegel Institute in the morning and will meet European Commission officials, including President José Manuel Barroso, in the afternoon to discuss EU and Hungarian budget issues .

"Hungary asked for a flexible credit line and finally the IMF said 'no'," Reuters cited Orbán as telling a seminar in Brussels.

"The negotiations are still open but now we are very close to that 'no'," he said, adding the IMF told Hungary the country needed loans, not a flexible credit line.

Hungary said it had paid back early a tranche of an IMF loan worth 607 million euros as it presses ahead with debt issuance plans designed to avoid having to seek more credit from the Fund.

There is nothing to be surprised about that the IMF will not grant Hungary and FCL. Although the cabinet has been very much hopeful to receive that kind of financial assistance the IMF made it clear a number of times that the subject of the talks is a stand-by facility rather than an FCL or PCL.

Over the past few days, the cabinet has become more resolute that an FCL with looser conditions is what the IMF should grant Hungary, most likely in view of the improved global investment climate and the meeting of the deficit target in 2012. The IMF, though had no reason to reconsider its previous stance. For that Hungary would need to present stable economic fundamentals and disciplined economic policy. Although the fiscal loosening in 2011 was indeed followed by strict fiscal measures, the zigzags in economic policy made this insufficient for the IMF not to insist on the co-ordination of economic policy in scope of a credit deal.

Orbán’s information brings no change whatsoever into the relation between the IMF and the government, as at this point chances of any kind of credit agreement are slim to none.

Flexible Credit Line

The FCL is available to countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes. FCL arrangements are approved for countries meeting pre-set qualification criteria.

The FCL is a renewable credit line, which could be approved for either one or two years. Two-year arrangements involve a review of eligibility after the first year. If the country draws on the credit line, the repayment period is between three and five years.

There is no cap on access to Fund resources under the FCL, and access is determined on a case-by-case basis. Qualified countries have the full amount available up-front, with no ongoing conditions. There is flexibility to either draw on the credit line at the time it is approved, or treat it as precautionary.

EDP exit "very close"

According to a report by Bloomberg, Orbán said Hungary’s talks with the IMF are “coming to an undesired end."

He also labelled Hungary as a “European success story", saying the country’s economic output will rise and its budget deficit will remain below 3.0% of GDP therefore it is “very close" to exiting the excessive deficit procedure (EDP).

The PM added that Hungary wants to join the Eurozone “in due course".

FX bond issuance this month or early Feb

Budapest is also preparing the ground for its first foreign currency bond issue abroad since 2011."We will go out to the markets probably this month or the beginning of the next month," Reuters cited Orbán as saying.

"Why would we need to get any kind of loan from the IMF if we are able to be financed from financial markets?" he said.

Orbán, who faces elections in 2014, has made clear he will not accept foreign influence on his economic policy-making, which has also drawn criticism from investors for going against European Union "orthodoxy".

Hungary plans to raise EUR 4.5 billion from the international debt market this year and “would presumably hope to take care of at least a third of that amount with any bond issue that follows the current roadshow," Bloomberg cited Blaise Antin, who helps manage about USD 10.5 bn of emerging-market debt at TCW Group Inc. in Los Angeles, as saying by e-mail yesterday after attending one of the meetings.

Market conditions permitting, it would make most sense for Hungary to sell 10-year bonds as they currently have no maturities between 2021 and 2041, Antin added.

Late nomination of new c.bank chief

Orbán also said today he will present his candidate for Governor of the central bank (NBH) one day before current Governor András Simor’s mandate ends. Click on the link below for more on this and the EDP issue.