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.
Orban has been openly hostile to Andras Simor, the central bank president, calling him an "offshore knight" because Simor owned a company registered in Cyprus — which he sold before taking on his central bank role — to avoid Hungarian taxes. The government has also faulted the bank's recent interest rate hikes, saying they would slow the economy.
The new central bank law takes away Simor's right to nominate his own vice presidents and clears the way for greater government influence over the Monetary Council, which sets interest rates. Another law that took effect New Year's Day allows the merger of the central bank with the country's financial regulator, a de facto demotion for Simor.
Fidesz lawmakers have said the merger would not be implemented until Simor's mandate expires in 2013.Comment on this story
The EU sees Hungary's request for financial help as its biggest leverage in the debate over the new laws.
Hungarian negotiator Tamas Fellegi has said he intends to meet with EU officials in Brussels after his trip to Washington, but an European Commission spokesman said no talks were scheduled yet.
An official for the European Commission in Brussels said EU negotiators "won't go back to Budapest until we have this certainty" that the bank chief will remain independent, a key condition also for the European Central Bank and the IMF. He spoke on condition of anonymity because of the sensitive talks.
Gabriele Steinhauser contributed from Brussels.