European Crisis is alive and kicking – IMF Rejects Hungary Bailout while Moody downgrades Ireland

The recent recovery in Euro from 1.2 to 1.3 USD and the strength of the stock markets would make you think that the Greek Contagion is behind us.However that is far from the truth as most parts of Europe continues to see a distressed banking sector  and deteriorating public finances.Hungary which has been under a crisis since 2008 receiving IMF aid to stave off bankruptcy is under the headlights again.IMF and EU abruptly called off talks with Hungary over further aid.In a statement they said that the Hungarian government needs to take more measures to reduce the fiscal deficit.Hungary has seen a change in government with the new administration criticizing the old one for lying about the health of the public finances.It has recently passed a new bank tax to raise more money to reduce the fiscal deficit.However none of these plans seems to have assured the IMF and EU teams which left Hungary .The abrupt departure may have something to do with the new bank taxes which will hurt the European parents of local banks as well.In a predictable reaction,Hungary’s stock market and the currency forint fell sharply in trading.

Forint hit by breakdown of talks with IMF, E.U. – Marketwatch

The Hungarian forint fell sharply on Monday after a mission from the International Monetary Fund left Budapest over the weekend after the conclusion of talks with the government was postponed. “While there is much common ground, a range of issues remain open,” the IMF mission said in a statement. “The fiscal deficit targets previously announced — 3.8% of GDP in 2010 and below 3% of GDP in 2011 — remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives.”

Bank Backs New Tax – WSJ

Hungary’s controversial tax on financial institutions has won support from an unlikely quarter: Hungary’s largest independent retail bank.OTP, Hungary’s largest lender by assets, is in favor of the tax— which aims to raise nearly $1 billion this year to plug a hole in the government budget—even though it will hurt profits.The new tax is the cornerstone of a plan to narrow the budget gap and restore confidence after June’s market turmoil, when Hungary’s politicians hinted the deficit could be larger than expected. The forint fell and the cost of insuring Hungarian debt jumped. OTP’s shares also plunged. The tax is to stay in place next year and perhaps in 2012, then be phased out.Foreign banks have called the new tax unfair, and have taken their case to the International Monetary Fund and European Union, saying the tax would hurt their ability to help Hungary.

Ireland gets a Moody’s Downgrade as well

Ireland which has been at the forefront of the European crisis got a downgrade from Moody’s though it is still a stable one.Ireland’s financial and real estate sector faced a massive fall in the aftermath of the Lehman crisis.The government has to tighten its budget severely leading to a sharp fall in GDP.Ireland had a large financial sector which was hit hard by the crisis.The Moody’s downgrade as usual comes more a sharply lagging indicator.

Moody’s Cuts Ireland to Aa2, Cites ‘Loss of Financial Strength’ – Businessweek

Moody’s Investors Service downgraded its rating on Ireland’s government bonds to Aa2 from Aa1, citing the government’s “gradual but significant loss of financial strength.”The agency has a “stable” outlook on the country’s debt, it said today in an e-mailed statement. Moody’s also cut its rating on Ireland’s so-called bad bank, the National Asset Management Agency to Aa2, with a stable outlook.Ireland’s recession and real-estate slump eroded tax revenue and left the country with the widest budget deficit of any euro-area nation. While the government has cut state workers’ pay and raised taxes in a bid to narrow the shortfall, the cost of aiding the banking industry is adding to pressure on the public finances.