Hat in hand again

„Hungary was days from default when it turned to the IMF and the EU for €20 billion in financial support after lending markets froze up in the wake of the collapse of Lehman Brothers in 2008. Today, with some €5 billion of the pension money left, the situation is not quite as urgent. But bond traders clearly felt the Mr Matolcsy’s approach was too unorthodox for their tastes. With the debt problems in the euro zone looking rather more serious even than Lehman’s bankruptcy, lenders became ever more reluctant to finance Hungary. By last week, all three rating agencies had Hungary’s sovereign debt on watch for a downgrade to junk status, while the forint, its currency, had hit its lowest-ever level against the euro.

The IMF and the EU will probably want to see a reduction in the scale of the windfall taxes in exchange for their support. And they will almost certainly require changes to plans to make banks swallow the costs of bailing out homeowners who cannot pay their mortgages denominated in foreign currency.

Hungary may yet have one escape route. Immediately after the government’s announcement last week that it would return to the IMF, the forint began to strengthen, giving the country some much-needed breathing room. If talks with the IMF drag on long enough, there is a chance that the external economic environment will improve enough to let Hungary off the hook. Mr Matolcsy may be gambling once again that there could be one more outing for his unorthodox approach.”