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Hungary weighs

Hungary weighs "unconventional" means to halt HUF weakening; sees euro entry in 2012-2014

18.2.2009 16:59

BUDAPEST. INTERFAX CENTRAL EUROPE - Hungary is considering the use of "unconventional" methods to halt the weakening of the forint, which fell to a record low against the euro earlier this week, Hungarian Prime Minister Ferenc Gyurcsany told reporters on Wednesday.

"Yesterday I asked the Finance Minister and the National Bank of Hungary whether there exist any unconventional methods that could be used in defense of the forint," Gyurcsany said. "I asked them to weigh all the risks and benefits."

On Tuesday the forint reached an all-time weak position of EUR/HUF 309.4 against the euro, and traded near this level Wednesday morning before correcting to around EUR/HUF 305 before noon.

Gyurcsany noted that Hungary cannot directly copy the Polish model, under which the Polish government is planning to sell on the forex market euros that it received in the form of EU funds. Gyurcsany said that in Hungary's case, such funds are received by the central bank rather than government agencies, and their total size as a proportion of forex market volume is considered "moderate" at best.

Gyurcsany also said that if a recently unveiled tax and budget reform plan - which includes a VAT hike, labor tax cuts and cuts in social benefits and pensions starting mid-2009 - is properly executed, Hungary can introduce the euro "not before 2012, but no later than 2014."

The prime minister added that the tax and budget measures - which are primarily aimed at reducing the burden on businesses and increasing taxes on consumption - can add 1.5-2 percentage points to Hungary's GDP growth potential.

Gyurcsany said that Hungary's budget deficit will remain under 3% of GDP this year even if the country's GDP shrinks by a worst-case-scenario 3.5%. On that note, the prime minister dismissed press and analyst commentary that the government could boost the economy by running a much higher budget deficit, as most EU countries have done, including possible double-digit deficits in the U.K. or Ireland.

"You can have a deficit, but you have to finance it," Gyurcsany said, adding that running a higher deficit would place an enormous cost on the budget in the form of interest payments, especially as foreign investors may shy away from buying forint bonds in the current volatile exchange rate environment.

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