Hungary has started what promise to be difficult talks with the International Monetary Fund on a vital loan.
Budapest has central Europe’s highest debt load and its export-driven economy is heading into recession and without IMF help it will not be able to borrow more.
The problem is that Prime Minister Viktor Orban is determined to cling on to his unorthodox voter pleasing economic policies ahead of elections in 2014.
For Orban to even enter talks on a multi billion-euro loan with the IMF and EU is a major political climbdown and he is not likely to give in easily to lenders’ demands.
The negotiations are expected to drag on for several months
The long-awaited start of talks prompted a rally in Hungarian government bonds and boosted hopes for a cut in official interest rates – offering Orban more room to manoeuvre on spending.
On Tuesday, Orban flagged up a possible extension of social tax cuts for employers to protect jobs in coming years and said he would fight for the measure if needed.
“While we have to fight a battle domestically for the job protection action plan, we should not have any illusions, especially in the shadow of the talks that start now, that we will have to fight an international battle as well,” Orban told a meeting of the Hungarian Chamber of Commerce. “I’m ready for that.”
Orban wants to preserve his flagship flat tax policy to help families and would be reluctant to impose a wealth or property tax that could hit large swathes of the population ahead of the 2014 election, a key test of his handling of the economy.