Tuesday, July 27, 2010

Romania vs Hungary: who deals best with the IMF?

The Financial Times
July 26, 2010 by Chris Bryant

The arrival of an International Monetary Fund mission in Romania on Monday, barely a week after its officials left neighbouring Hungary in a huff, is not without a certain irony.

Hungary, you’ll recall, was long the Washington-based lender‘s darling, owing to an ardour for austerity that began way back in 2006. But preferring the role of pugilist to that of poodle, Viktor Orban, Hungary’s new prime minister, told the IMF last week that it could keep its policy prescriptions. Or to put it another way: having got out, the IMF should stay out.

Step forward Romania, which after dragging its feet at the start of the crisis, now seems hell-bent on stealing the mantle of fiscal rectitude that Hungary has cast off.

With a budget deficit threatening to top 9 per cent this year, ministers hastily agreed a savage packet of austerity measures in May, including a 25 per cent public sector wage cut.

Later they added a 5 percentage point hike in VAT to the cocktail mix, when some of the original measures failed to pass muster with the constitutional court. Tens of thousands of public sector job cuts are set to follow.

Neil Shearing at Capital Economics notes this morning that the fiscal cutbacks - worth a combined 2.3 per cent of GDP - may still not be enough to meet the revised 6.8 per cent target agreed with the IMF and EU.

Moreover, Shearing writes that the economy is likely to contract by 2.5 per cent this year and “will do well to stagnate in 2011 too.”

The only silver lining, he notes, is that “at least the government has shown enough commitment to austerity to keep its IMF deal alive - in stark contrast to recent developments in neighbouring Hungary.”

Jeffrey Franks, IMF mission chief in Romania, confirmed as much on Monday telling reporters that Romania was in no danger of facing a suspension of its bailout loan (unlike Hungary), according to Bloomberg.

With an economy set to grow by 0.6 per cent this year and around 2.5 per cent in 2011, Hungary may argue it is following the more sensible course.

But as Capital Economics noted last week, Hungary will at some point be forced to re-engage the IMF, except by then the conditionality will be far less favourable.

Financial markets will ultimately decide whether poodle or pugilist is the more effective strategy.

No comments: