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Europe

IMF, EU suspend talks on emergency loan to Hungary

The IMF and the EU have suspended a review of Hungary’s existing credit line, saying Budapest needs to do more to slash its deficit and improve fiscal conditions.

Hungarian forints in various denominations

Hungary's forint could become a victim of speculators

Both the International Monetary Fund (IMF) and the EU on Saturday suspended a review of Hungary's funding program. That means Budapest will lose access to what remains of a 19.4 billion ($25.1 billion) loan package, created by the EU and IMF, currently being used to support government finances.

EU financial affairs chief Olli Rehn

Rehn said tough decisions needed to be taken by Hungary

"The correction of the excessive deficit by next year will require tough decisions, notably on spending," said EU economic affairs commissioner Olli Rehn. "Care will also be needed to ensure a stable environment for both domestic and international investors."

Hungary vowed to slash its deficit to 3.8 percent of gross domestic product this year - and 3 percent in 2011 - as part of the lifeline agreement with the EU, IMF and World Bank in 2008.

Hungarian Finance Minister Gyorgy Matolcsy said Hungary was keen to resume negotiations. "The government will of course continue talks with international organizations including the IMF and the EU," he said in a statement published by the national news agency MTI.

Last month, Prime Minister Viktor Orban unveiled austerity measures, including efficiency savings worth up to 430 million euros and a tax on banks.

Measures 'fall short'

However, the European Commission said the corrective measures are "largely of a temporary nature" and "fall somewhat short" of what is required.

Hungarian Prime Minister Viktor Orban

Prime Minister Viktor Orban has already introduced austerity measures

The IMF said it was vital for Hungary to reassure markets by achieving the budgetary targets.

"In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced… remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives," the IMF said in a statement on Saturday.

The good news is that Hungary has returned to a positive economic growth path following the global economic downturn and actually has one of the lowest budget deficits in the EU.

Analysts warned on Saturday that Hungary's forint currency could drop in value when financial markets reopen on Monday, due to uncertainty over the international safety net.

Richard Connor (Reuters/AFP)
Editor: Sonia Phalnikar

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