September 8, 2010 11:11 pm

Hungary agrees to cut budget deficit

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Hungary has bowed to a key European Union demand by agreeing to cut its budget deficit to below 3 per cent of gross domestic product next year, helping to alleviate investor concerns about the country’s fiscal position.

The government sparked market unease in July when budget talks with the International Monetary Fund and European Union were suspended after a disagreement about how fast Hungary should cut its deficit and by what means.

Budapest later added to the uncertainty by indicating it would not renew a €20bn IMF-EU credit lifeline when it expires in October and would instead finance its deficit via the market -- a position it reiterated on Wednesday.

“The government today made a very important decision, namely it has approved the economy minister’s proposal that Hungary in 2011 undertakes to cut its budget deficit below 3 percent,” Gyorgy Matolcsy, economics minister, told a news conference, according to Reuters.

“The government has authorised the economy ministry to prepare the first draft of the 2011 budget based on this.”

The announcement followed a meeting of EU finance ministers on Tuesday during which EU officials indicated that they would not support a deficit higher than the 3 per cent target, Mr Matolcsy said.

It also came after the forint, Hungary’s currency, had touched a record low against the Swiss Franc on Wednesday, sparking fears for Hungarian consumers who borrowed heavily in the currency before the crisis and whose repayment costs rise when the forint weakens.

The economy minister specified several conditions for meeting the 3 percent goal, including that the economy grows by more than 2.5 per cent next year and that a controversial new financial sector levy is maintained in 2011.

He also reiterated a pledge that Hungary would meet this year’s budget shortfall of 3.8 per cent of GDP.

The forint rallied following the announcement as the euro rebounded against the franc, with analysts saying the news was a positive for Hungarian assets.

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