IMF and EU suspend talks with Hungary, pressure is on for Romania's upcoming review

Just days before an International Monetary Fund mission is expected in Bucharest for another review of the stand-by agreement with Romania, neighbor country Hungary, which has taken a similar size loan package from the IMF is likely to be denied access to the remaining of its financing package. The IMF and the European Union have suspended evaluation discussions with Hungarian government representatives, warning the country needs to take drastic measures to cut the budget deficit, according to Reuters. Romania has been recently on a similarly hot seat while negotiating with the IMF. The country needed to cut budget spending and increase budget revenues and has managed to do so in the end by cutting public clerk salaries and by increasing VAT. This has happened after a failed attempt to cut pensions, which was labeled non-constitutional, a measure which was threatening the future of the agreement. But Romania had to make decisions nearly from one day to the other in order to unlock a new loan disbursement from the IMF. And a new review mission is coming up for Romania on July 26. While the outcomes of the IMF revision missions depend on the actual measures taken by the countries reviewed, the recent development in Hungary shows the Fund is not shy about saying no to a new loan disbursement, which puts pressure on what Romania will do next. For Hungary, “Suspension of talks means Hungary will not have access to remaining funds in its $25.1 billion loan package, created by the International Monetary Fund and European Union and which it now uses as financial safety net, until the review is concluded,” writes the Reuters article. While acknowledging Hungary's efforts towards economic recovery, the IMF representatives say more remains to be done to cement these gains and put Hungary on a strong and sustainable growth path. “In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced—3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011—remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” read an IMF statement. Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop. “Difficult decisions will be needed not only on the revenue side--where the high financial sector levy, which is likely to adversely affect lending and growth, is planned to be temporary--but also on the spending side. In addition, the large loss-making state-owned enterprises need to be restructured to reduce their burden on the budget,” according to the Fund. Over the past two weeks, the IMF mission has conducted intensive discussions with the authorities covering these issues. “While there is much common ground, a range of issues remain open. The mission will therefore return to Washington, D.C. The IMF will continue to actively engage with the authorities with a view to bridging remaining differences,” the IMF statement concludes. Read the entire Reuters article