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Hungary government commits to budget goal


Hungary's State Secretary Mihaly Varga speaks during a news conference about the state of the Hungarian economy in Budapest June 5, 2010. REUTERS/Laszlo Balogh
Hungary's State Secretary Mihaly Varga speaks during a news conference about the state of the Hungarian economy in Budapest June 5, 2010. REUTERS/Laszlo Balogh

By Krisztina Than and Marton Dunai

BUDAPEST (Reuters) - Hungary's government said on Saturday it aimed to meet this year's budget deficit target, seeking to draw a line under "exaggerated" talk of a possible Greek-style debt crisis that has unnerved global markets.

State secretary Mihaly Varga, leading a review of the country's public finances, said Hungary's previous socialist governments had hidden the true extent of the fiscal shortfall, and that additional measures would be needed to reach the 3.8 percent of GDP goal agreed with international lenders.

Analysts welcomed the government's intention to meet the target, which they said should calm markets somewhat on Monday, although details were needed and any tax cuts should be offset by spending cuts. The market consensus for this year's deficit is 5 percent.

They also said the government would need to work hard to restore credibility in its policies following a spate of contradictory comments on fiscal issues.

Fears of a Hungarian debt crisis pushed the euro to a four-year low on Friday after a ruling party official said the country had only a slim chance of avoiding Greece's fate, and the prime minister's spokesman said he supported this view.

"Those comments ... are exaggerated, and if a colleague makes them it is unfortunate," Varga told a news conference.

"The situation is consolidated, and the planned deficit (target) is attainable, but for it to be attainable the government must take measures."

He said some tax revenues were lower than planned in the current budget and several spending items higher or not included at all.

"We must state that the (recent) Bajnai government, similar to the Gyurcsany government in 2006, ... did not present a credible picture of the real state of the country," Varga said.

Asked repeatedly if it could be stated that Hungary was not close to default, Varga said: "Any comparison with countries with much higher CDSs (debt risk profiles) is unfortunate. These do not give a credible picture of the state of Hungary ..."

He said the government would come up with an action plan at a meeting ending on Monday.

Varga later told MTI news agency he trusted that decisions on the economy would be made on Monday and made public either on Monday, or by Tuesday morning the latest.

Varga declined to give an estimate for the 2010 deficit but said the government did aim to meet the 3.8 percent target agreed with the IMF and the European Union, which rescued Hungary from financial collapse in October 2008.

"Calmly, but firmly, we must prepare an action plan as soon as possible, a series of measures that can help us attain the deficit target," he said. "The Hungarian economy needs immediate, urgent measures."

EXPLANATIONS SOUGHT

Hungary's new center-right government, sworn in a week ago after winning elections in April, has so far not put forward a clear economic plan, saying only it wants to cut taxes and create jobs to boost growth.

Financial markets and investors had initially welcomed the new administration, saying its strong mandate -- a two-thirds parliamentary majority -- would encourage it to carry out much needed structural reforms in the inefficient state sector.

But damage done this week by comments that seemed to show up profound divisions within the government over how to tackle the fiscal conundrum will take time to repair, analysts said.

The European Commission warned Hungary on Thursday against losing the confidence of markets after talks with Prime Minister Viktor Orban, and urged it to accelerate fiscal consolidation.

The mixed messages from the government suggested it either wanted to backtrack on earlier promises of deep tax cuts, or set the domestic stage for potentially painful spending cuts or reforms, some analysts said.

Others said the government had failed to anticipate the market impact of chasing a domestic political agenda.

"We believe that yesterday's dramatic comments were intended for domestic consumption and 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.

Hungarian political scientist Richard Szentpeteri Nagy of think tank Meltanyossag told Reuters: "(Ruling party Fidesz) had to sketch out some economic nightmare scenarios.

"The motivation behind this was domestic, and not the careful, well thought-out public comments that would be correct in the international world."

CREDIBLE PROGRAMME NEEDED

The IMF's mission chief is expected in Hungary for informal talks next week. Varga said it would not be an official review. The last regular review was in February.

Local news website portfolio.hu said the IMF mission chief would arrive on Monday.

Hungary has not drawn on any IMF funds this year so far, but the new government has said it wanted to seek a new deal with lenders because the current financing deal expires by October.

Analysts said program details were needed and tax cuts may be delayed.

"The 3.8 percent target is achievable only if the government ... cuts spending or raises revenues. I don't think that tax cuts are possible in this situation," Zoltan Torok at Raiffeisen said.

Hungary had a deficit of 4 percent in 2009 at the price of deep spending cuts that exacerbated a recession but rebuilt market confidence.

The finance minister of the previous government said there were risks attached to the 2010 budget but the target could be met with tight fiscal policy.

(Reporting by Krisztina Than and Marton Dunai; editing by John Stonestreet and Alison Williams)

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