Hungary backtracks on talk about default

[June 05, 2010]  BUDAPEST, Hungary (AP) -- Hungary's government on Saturday tried to calm investors and distanced itself from earlier comments by officials claiming that the country was close to defaulting on its debts.

State Secretary Mihaly Varga, a former finance minister, described talk of a default "exaggerated ... and unfortunate," adding that the new, center-right government of the Fidesz party was committed to the 2010 budget deficit of 3.8 percent of GDP set by the previous administration even if "immediate and urgent" steps were needed to achieve it.

"The situation is consolidated and the planned budget deficit can be met," Varga said, adding that declarations putting Hungary in the same group as Greece or other countries struggling with huge deficits "do not give a credible view of Hungary's status."

Statements Thursday and Friday from several Fidesz and government officials, which compared Hungary's situation with that of Greece and raised the possibility of a budget gap twice as big as planned, shocked financial markets and were seen as one of the reasons the euro fell to four-year lows, while the Hungarian forint fell around 5 percent and the Budapest Stock Exchange ended Friday 3.3 percent lower on the day.

Analysts seemed perplexed by the chilling comments and European officials also sought to allay market fears that Hungary was on the edge of insolvency.

"Hungary has made serious progress in consolidating its public finances over the last couple of years," Olli Rehn, Europe's commissioner for economic and monetary affairs, told reporters after a meeting of the Group of 20 in South Korea on Saturday. Any talk of a risk of default "is widely exaggerated," he said.

"The claim that the country is on a brink of sovereign default and risks following the Greek path does not hold up against the facts," said a report on emerging markets from Goldman Sachs analyst Magdalena Polan. "Hungary has already faced a crisis and asked for IMF and EU assistance in late 2008. In this context, Hungary is some 18 months ahead of Greece."

The report also noted that Hungary still had access to unused parts of the rescue package of 20 billion euros ($27 billion) it was granted in 2008 and that the country could "roll over" or replace its maturing debt with new loans "without a problem."

Goldman Sachs, echoing analysis from several other financial institutions, concluded that the Fidesz comments were likely meant to cool Hungarians' expectations toward the new government, which took over last week after eight years headed by the Socialist Party.

The "dramatic" comments "were used to build a dramatic backdrop that would let Fidesz backtrack on a large share of its campaign promises and broadly continue with the fiscal policies of the previous government, as well as preparing the ground for another round of IMF talks," Goldman Sachs said.

Varga, head of a fact-finding panel tasked with reporting on the state of the economy, said several items in the budget prepared by the "crisis management" government led by Gordon Bajnai "are not true and are orders of magnitude removed from reality."

According to the panel, tax revenues were often overestimated in several different areas, while expenditures were habitually underestimated, Varga said.

Varga only spoke in general terms without concrete figures but the government has pledged to unveil an action plan within the next 72 hours, in the wake of an emergency, three-day Cabinet meeting expected to start later Saturday called by Prime Minister Viktor Orban to review the situation.

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Associated Press business writer Kelly Olsen in Busan, South Korea, contributed to this report.

[Associated Press; By PABLO GORONDI]

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