Hungary has officially requested precautionary financial help from the IMF and the European Union, confirming a sharp reversal of the government's opposition to working under the international lender's guidance.
Both the IMF and the European Commission said on Monday that they had received a request from Hungarian authorities for possible financial assistance, in line with an announcement made by Hungary last Thursday. They said the Hungarian government was seeking precautionary help.
Hungary took investors by surprise last week when it said it planned to seek a new deal with the International Monetary Fund, after a previous loan expired last year and the centre-right government sought to pursue its own policy ideas on spurring economic growth.
But the euro zone debt crisis, and Hungary's weak economic outlook coupled with the threat of a downgrade to junk debt status prompted the government to take a sudden U-turn.
The IMF has received a request from the Hungarian authorities for possible financial assistance. The authorities have sent a similar request to the European Commission and indicated that they plan to treat as precautionary any IMF and EC support that could be made available, Christine Lagarde, Managing Director of the IMF said in a statement on Monday.
The IMF said its delegation, which is currently in Budapest for a regular economic review, would now return to Washington for consultations with the Fund's management.
The European Commission today received a request from the Hungarian authorities for possible EU financial assistance... They have also indicated that their intention is to treat any EU support that might be made available as precautionary, the Commission said in separate statement.
Prime Minister Viktor Orban's government -- which has pursued unconventional policies since it swept to power in April 2010 -- may face hard talks with lenders if it wants a deal without strict conditions attached, analysts have said.
The forint had firmed sharply to around 303-304 versus the euro on the announcement by Friday, but gave back some of those gains to trade at 306.84 on Monday as markets remained cautious and were eying rating agencies' views, primarily Standard and Poor's which had warned Hungary could be downgraded by the end of this month.
Talks between Hungary and the IMF fell apart in July 2010 amid disagreement over policy when Hungary's previous IMF/EU deal signed in 2008 was still in effect.
Some analysts have said the government may want to avoid a ratings downgrade and keep financial markets on its side with the promise of a new deal, following a similar tactic by Turkey which held stop-start negotiations with the IMF for almost two years after its standby deal expired in May 2008.
Other said the government could be able to agree with lenders as next year's budget contained big spending cuts, and targeted a deficit of 2.5 percent of GDP even though some of its measures such as a bank tax and a controversial mortgage repayment scheme could be sticking points in the talks.
The IMF is asking nothing which would not be in the interest of the government if it wants to stabilise the economy, said Zoltan Torok, an analyst at Raiffeisen, adding that the government could reach an agreement with lenders.
Torok said he did not believe the government was considering playing the Turkish game of buying time, but did not exclude this possibility either, if external financing conditions improved in the next few months.
(Reporting by Krisztina Than, Gergely Szakacs; Editing by Ruth Pitchford)