BUDAPEST, Oct 18 (Reuters) - Hungary must cut its current account deficit to reduce its vulnerability to the global financial crisis and aim for a fast adoption of the euro, central bank Governor Andras Simor said on Saturday.
Simor said steps taken by the authorities to shield Hungary from the global crisis and restore investors' confidence in domestic markets were a temporary solution.
'In the longer run, however, only the reduction of our existing vulnerabilities can bring a solution,' Simor told a summit called by the government to assess the fallout of the financial crisis.
'The current account deficit has to decline,' he added.
Hungary is heavily reliant on foreign capital flows because it has high debt and runs a sizeable current account deficit. The central bank expects a current account deficit of 5.3 billion euros ($7.14 billion) or 4.9 percent of GDP this year.
Foreign investors have been dumping forint assets in the past week on concerns that Hungary might become the next Iceland after Hungarian officials lined up potential help from the International Monetary Fund as a 'last resort' and turned to the European Central Bank for financing to shore up falling markets.
Simor said the adoption of the euro was one of the steps which could help restore investor confidence in Hungary and reduce its long-term vulnerability to external shocks.
One of the steps is 'the adoption of the euro, which will eliminate exchange-rate risks on euro-denominated loans and will significantly reduce risks of Swiss franc-denominated ones,' Simor told the meeting with politicians and business leaders.
'The precondition for the adoption of the euro at the earliest possible date is that we should strengthen macroeconomic stability,' he added.
Hungary relies on foreign investors buying its government paper to finance its large external debt and, with forint interest rates high, the vast majority of lending has been in foreign currencies in the past few years.
In the past two weeks banks which have been lending heavily in euros and Swiss francs found it difficult to hedge their exposures as liquidity dried up, and there are concerns that if the forint sharply extends its losses, some households may face the risk of not being able to finance their repayments.
Hungary has no official target date for euro entry, and in the past had to abandon several target dates due to heavy overspending which led to a huge budget deficit in 2006.
SPENDING CUTS
The rise in the budget deficit to above the European Union limit of 3 percent of GDP triggered disciplinary steps known as the excessive deficit procedure.
'The task of the government is to achieve that the excessive deficit procedure should end against Hungary as soon as possible ... As a result of the government's (fiscal) adjustment measures, this may happen one year earlier than it was planned in the euro convergence programme,' Simor said.
As part of its measures, Hungary's government decided to cut the budget deficit more sharply more than previously planned, to 2.9 percent of GDP next year, instead of the original target of 3.2 percent.
A revised budget draft, which was published by the Finance Ministry on Saturday, scrapped earlier tax cut plans. Simor also called for further cuts in state spending.
'We need a sustainable reduction of spending that also facilitates growth potential,' Simor said.
(Reporting by Gergely Szakacs, Writing by Krisztina Than, editing by Swaha Pattanaik) ($1=.7424 Euro) Keywords: HUNGARY DEFICIT/ tf.TFN-Europe_newsdesk@thomson.com ak COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
Simor said steps taken by the authorities to shield Hungary from the global crisis and restore investors' confidence in domestic markets were a temporary solution.
'In the longer run, however, only the reduction of our existing vulnerabilities can bring a solution,' Simor told a summit called by the government to assess the fallout of the financial crisis.
'The current account deficit has to decline,' he added.
Hungary is heavily reliant on foreign capital flows because it has high debt and runs a sizeable current account deficit. The central bank expects a current account deficit of 5.3 billion euros ($7.14 billion) or 4.9 percent of GDP this year.
Foreign investors have been dumping forint assets in the past week on concerns that Hungary might become the next Iceland after Hungarian officials lined up potential help from the International Monetary Fund as a 'last resort' and turned to the European Central Bank for financing to shore up falling markets.
Simor said the adoption of the euro was one of the steps which could help restore investor confidence in Hungary and reduce its long-term vulnerability to external shocks.
One of the steps is 'the adoption of the euro, which will eliminate exchange-rate risks on euro-denominated loans and will significantly reduce risks of Swiss franc-denominated ones,' Simor told the meeting with politicians and business leaders.
'The precondition for the adoption of the euro at the earliest possible date is that we should strengthen macroeconomic stability,' he added.
Hungary relies on foreign investors buying its government paper to finance its large external debt and, with forint interest rates high, the vast majority of lending has been in foreign currencies in the past few years.
In the past two weeks banks which have been lending heavily in euros and Swiss francs found it difficult to hedge their exposures as liquidity dried up, and there are concerns that if the forint sharply extends its losses, some households may face the risk of not being able to finance their repayments.
Hungary has no official target date for euro entry, and in the past had to abandon several target dates due to heavy overspending which led to a huge budget deficit in 2006.
SPENDING CUTS
The rise in the budget deficit to above the European Union limit of 3 percent of GDP triggered disciplinary steps known as the excessive deficit procedure.
'The task of the government is to achieve that the excessive deficit procedure should end against Hungary as soon as possible ... As a result of the government's (fiscal) adjustment measures, this may happen one year earlier than it was planned in the euro convergence programme,' Simor said.
As part of its measures, Hungary's government decided to cut the budget deficit more sharply more than previously planned, to 2.9 percent of GDP next year, instead of the original target of 3.2 percent.
A revised budget draft, which was published by the Finance Ministry on Saturday, scrapped earlier tax cut plans. Simor also called for further cuts in state spending.
'We need a sustainable reduction of spending that also facilitates growth potential,' Simor said.
(Reporting by Gergely Szakacs, Writing by Krisztina Than, editing by Swaha Pattanaik) ($1=.7424 Euro) Keywords: HUNGARY DEFICIT/ tf.TFN-Europe_newsdesk@thomson.com ak COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.