Bela Szandelszky, Associated Press
BUDAPEST, Hungary — Hungary's woes deepened Wednesday as the government's controversial economic policies and uncertainty over whether it can agree on a deal with the IMF drove its currency to a new low against the euro.
Hungary's borrowing costs also rose to levels not seen since 2009, forcing the government to cancel a planned bond swap auction Wednesday.
Hungary's economy has been staggering since 2008, when the global credit crunch prompted the Central European nation of 10 million to accept an International Monetary Fund bailout of €20 billion ($26 billion). Over the past months, investors have shied away from buying Hungarian debt, and the country's credit rating was cut to junk status by two U.S. ratings agencies late last year. Unemployment is 10.8 percent and the country could be heading toward a recession.
Hungary is seeking a financial "safety net" from the IMF and the European Union, but preliminary talks ended early in December after the government pushed ahead with new laws seen as infringing on the independence of the National Bank of Hungary. Talks with the IMF are due to restart next week in Washington.
On Wednesday, the euro rose to a record 321.40 forints, surpassing a peak above 317 reached only two months ago, while interest rates for Hungary's 10-year bonds was 10.6 percent, compared with 8.4 percent in early December.
"With problems likely to deepen in the eurozone and no sign that Hungary's policy credibility is improving, Hungarian assets look set to be in for a bumpy ride," said William Jackson, an emerging markets economist at Capital Economics in London.
The Economy Ministry insisted the forint's weakness "clearly did not reflect economic policy" but was the result of conjectures about the IMF deal.
"The IMF board will hold a meeting Jan. 18 whose agenda includes the mandate to be given to the delegation negotiating with Hungary," the ministry said in a statement. "Until then, it is obvious that speculation about the negotiations is playing the dominant role in the forint's exchange rate."
Investor skepticism, however, has been building for months about the government's unorthodox methods of keeping the state budget deficit within EU guidelines.
The government has put new taxes on banks, as well as the energy, telecommunications and retail industries, and nationalized some $14 billion in private pension assets to avoid direct austerity measures.
But the effects of the eurozone debt crisis and weak domestic consumption have hit growth, and Finance Minister Gyorgy Matolcsy had to revise the 2012 budget just weeks after it was presented to parliament in October.
Prime Minister Viktor Orban's conservative government decided not to extend the IMF deal in 2010 in order to keep its economic policies away from IMF control, but made an astonishing U-turn in November saying it would seek aid, but no new loans, from the IMF.
Orban has remained defiant, saying last week that IMF negotiations were "important but not crucial" and that the country would be able to "stand on our own feet" if a deal was not reached. His Fidesz party, which has a two-thirds majority in parliament, has been able to ram through its policies unimpeded.
But analysts have rejected such bravado.
"Hungary's government still seems to believe that it has room to negotiate or manage without the international lenders. They are wrong," said Gabor Ambrus of London's 4Cast. "Hungary's government needs to wave the white flag but it seems they are not yet willing to recognize this. The consequence will be enormous."
The issue of central bank independence is seen as the critical factor impeding new talks with the EU and the IMF.
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