Deficits, Elections & The IMF 

Why have Hungary and the IMF been chatting in the first place? A previous post highlights Hungary's fiscal deficit problem, which led to increased country risk and foreign reluctance to finance the Hungarian external deficit.   As Chapter 15 and this post by Simon Johnson outline, this is a classic case for the IMF — especially if elections are coming up. Here is the story from the Financial Times:

IMF breaks off talks with Hungary

This is a story we used to see a lot more ten or twenty years ago. Hungary and IMF have  broken off talks, as the new Hungarian government refuses to accept further austerity measures. The FT reports that the message is not entirely clear, as the economy minister later accepted that Hungary would cut its budget deficit to 3% of GDP by 2011. It looks as though the government is mindful of the local elections, which could see the rise of a far-right party that opposes foreign capital. The election are held in October. The EU also criticised the Hungarian policies, as well as attempt to undermine the independence of the central bank. Hungary currently does not need to draw on the €20bn standby facility, but the article says the country’s financial position remains precarious. The forint fell by over 3% against the euro after the news of the breakdown of talks came out. 

Update 7/23/2010: When It Rains, It Pours

From Bloomberg: Hungary Credit Rating May Be Cut to Junk After IMF Talks Fail

Standard & Poor’s said it is reviewing Hungary’s credit rating for possible downgrade after the collapse of negotiations with the International Monetary Fund and European Union. A cut would give Hungary’s debt a junk rating.

From Reuters: Ratings agencies threaten Hungary with downgrade

Moody's placed Hungary's Baa1 local and foreign currency government bond ratings on review, citing increased fiscal risks after the International Monetary Fund and the European Union suspended talks over their 20 billion euro ($25 billion) financing deal at the weekend.