Eurasia Group adds, however, that “in the end, a combination of market sentiment and EU pressure will likely compel the government to reach a deal with the IMF”.
It says that “the mortgage story clearly hurts consumer demand … and it comes in addition to two other ongoing drivers of a household credit squeeze – monetary policy (as) Hungary still has relatively high interest rates … and the fiscal austerity measures that have been in place for the past two years”.
The three-part household credit squeeze helps explain why the Fidesz government has been “so negative” toward the IMF and EU deficit and austerity guidelines. Fiscal policy is the only policy tool the government feels it has to boost growth and give the public some relief more generally. “And the broader public has been supportive of the government’s attacks on the IMF”.
The big downside of abandoning the IMF process, however, is that market sentiment may worsen dramatically in the coming weeks and months, Eurasia says. This would lead to further weakening of the forint, and a related worsening of the mortgage squeeze. “And this is likely what it will take to get Fidesz to seriously re-engage with the IMF – but they will do it when a combination of market sentiment and EU arm-twisting signals that they must … sometime this (autumn) we expect a deal between the government and IMF/EU”, it says.