Hungary aims to close IMF office, repay loan early

BUDAPEST — Hungary said yesterday it was considering paying back its bailout loan from the International Monetary Fund early as well as closing the organization's office in Budapest.

National Bank of Hungary President Gyorgy Matolcsy said in a letter addressed to IMF Managing Director Christine Lagarde that, while they appreciated "the valuable support" the Washington-based group gave the country, the stand-by credit program "is almost complete." As such, Matolcsy said, it was no longer necessary for the IMF to keep an office in Hungary.

The IMF said that since the current IMF representative in Hungary was due to leave soon anyway, it would comply with Hungary's request.

"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 said in a statement. "The IMF looks forward to continued cooperation with Hungary in the context of regular bilateral consultations as with other member countries."

Hungary still has $2.125 billion to pay the IMF from its original credit line of $25.5 billion. The last installment is due in early 2014, close to the country's national elections.

The country was given the credit line from the IMF and other creditors in 2008, during a Socialist-led government, after markets shunned its bond bond auctions — making it difficult for Hungary to repay its loans — while its currency and stock market plunged. But Prime Minister Viktor Orban's government chose not to renew the deal in 2010 to avoid closer IMF scrutiny of its economic policies.

In late 2011, however, Matolcsy, then the economy minister, said Hungary would again seek a "precautionary" deal with the IMF at a time when the forint, the Hungarian currency, had weakened sharply, bond sales were unsuccessful and the country's debt rating was about to be downgraded to below investment grade — or junk — by the main ratings agencies.

But the new IMF loan never materialized and Hungary's announcement — and the months of negotiations with the Fund that followed — were considered by analysts as part of a delaying tactic to gain time until the international financial situation stabilized and the country's bonds again became attractive to investors.

In February, Hungary sold $3.25 billion in foreign-currency bonds to investors, returning to the international debt market for the first time in nearly two years.

In his letter to Lagarde, Matolcsy outlined some of the successes achieved by the government, including of cutting of the state budget deficit to below 3 percent of its gross domestic product, as a result of "bold fiscal consolidation measures" and structural reforms.

Some of the "bold" measures have included the nationalization of some $14 billion in assets previously managed by private pension funds, windfall taxes on banks and other companies, taxes on all financial transactions and telephone calls, a flat income tax rate of 16 percent, forcing gas and electricity companies to cut utility prices for households and, at 27 percent, the EU's highest VAT rate.