Hungary minister eyes monetary not fiscal stimulus-UPDATE 3

Trade the News

Saturday September 04, 2010 08:05:12 PM GMT

* Economy minister rules out new IMF loan

* No room for fiscal stimulus, tight fiscal policy needed

* Pledges "sweeping" structural reforms in 2011-12

* Points to monetary stimulus used in other major economies

* Says this would mean cbank buying corp bonds in sec market

(Adds more comment on monetary stimulus, analyst)

By Gergely Szakacs and Krisztina Than

BUDAPEST, Sept 3 (Reuters) - Hungary has no room to bolster growth with more budget spending but the central bank could buy up corporate bonds to stimulate the economy in the way other major central banks have done, its economy minister said on Friday.

Speaking at a business forum, Gyorgy Matolcsy reiterated Budapest does not intend to sign a new financing deal with the IMF as the country's debts can be safely financed from markets in coming years.

He also said the new centre-right Fidesz government would pursue tight fiscal policy and meet its 2010 budget deficit target of 3.8 percent of GDP.

"We need to stimulate the economy in 2011-12," Matolcsy said. "But there is no room for fiscal stimulus. There is no room whatsoever and the Hungarian government does not even try anything that would harm the deficit of the budget, by leading the Hungarian economy towards artificial budgetary expansion."

He pointed to the sort of monetary stimulus other central banks have used since 2008's financial crisis to aid their economies, but said Hungary's central bank did not share his view that such stimulus was possible.

He later he told Reuters this would mean the central bank buying corporate bonds -- primarily those of the state development bank MFB on the secondary market -- and said he had discussed the idea with National Bank Governor Andras Simor.

"(The central bank) should subscribe or buy corporate bonds issues, just like the Fed, the ECB or the Bank of England," Matolcsy said on the sidelines of the business forum.

"This would (involve) the MFB, this would primarily mean the bond issuance of MFB," he said. "This is a secondary financial market operation conducted by every central bank in this crisis. For the time being, the management of the (Hungarian) central bank ... is a bit conservative (about this)."

The government has replaced the top officials at nearly all the main public institutions with its own candidates since taking office and has stepped up pressure on Governor Simor to resign over what it calls serious policy errors.

One analyst expressed concern about a new central bank policy.

"(Quantitative easing) would be a very bad idea for Hungary. The risks are very different for EM countries compared with developed market countries. The use of NBH balance sheet as a substitute for the central government is another march along the road of using off balance sheet policy," said Peter Attard Montalto at Nomura.

FISCAL POLICY

However, analysts said Matolcsy's comments suggesting Hungary would refrain from fiscal stimulus were positive.

"These comments are pretty favourable for the policy outlook, we believe," said Janos Samu at Concorde.

"They contradict some of the previous government communication, and strengthen the view that the government keeps an eye on the local municipal elections due 3 October, and intends to play its cards only afterwards."

Most analysts expect the government to reveal a credible economic and fiscal programme after the local vote which it hopes to win, a Reuters poll showed last week. [ID:nnLDE67P0EJ]

Hungary's new government surprised markets in July when its talks with the IMF and EU about a review of the country's existing funding deal collapsed.

Most analysts said a new deal with the IMF would act as a financial safety net and anchor fiscal policy, boosting Hungary's appeal for investors, even if the country does not need to resort to IMF funds again.

"Hungarian public debt has a balanced maturity structure, which is very good news, it can be financed entirely in the 2011-13 period from financial markets," Matolcsy said.

"The Hungarian government does not want a new loan agreement (with the IMF), we do not want one, because we not need one.

"We will remain strategic partners with the IMF... there will be a round of talks in October but that will not be about renewing the loan agreement," he added.

Matolcsy also said Hungary had to prepare for the possibility of a global double-dip recession and he did not expect a turnaround towards sustainable growth in the global economy and in Europe until the second half of 2012.

"We have passed the economic and financial trough, but to achieve dynamic growth from 2013, we need...reforms now," Matolcsy added.

(Reporting by Krisztina Than and Gergely Szakacs; editing by Toby Chopra)

(c) Copyright Thomson Reuters 2010. Click For Restrictions. http://about.reuters.com/fulllegal.asp