IMF worried on Eastern Europe fiscal consolidation

A string of accounting tricks and a lack of fiscal reform plans in Hungary, and to a lesser extent Poland, are cause for concern and could make the emerging European states vulnerable to shocks, a top IMF official says.

Anne-Marie Gulde, senior adviser in the International Monetary Fund's European Department, said on Tuesday that although central and Eastern Europe had largely returned to growth, the region was suffering from "adjustment fatigue" and remained vulnerable.

She was particularly critical of Hungary, where Prime Minister Viktor Orban's rightist government has pushed through one-off revenue-boosting measures including taxes on banks and and seizing $14 billion in private pension assets to cover budget spending.

"There are a lot of challenges and some things are going in the wrong direction in Hungary. There is a significant consolidation need," Gulde, who was in charge of several eastern EU bailout deals during the financial crisis, including Hungary's, told Reuters on the sidelines of a conference in Vienna.

Orban contends the measures will allow Hungary to become one of the few European Union countries to cut its budget deficit to below the bloc's prescribed ceiling of 3 percent of gross domestic product this year.

But Gulde said the measures -- particularly the pension grab -- were "accounting measures only" that delayed public obligations but ultimately did not change the fiscal position.

"You still have the deficit because you still have to pay those pensioners. You can report it to Eurostat ... but if you take in the intertemporal view of the deficit given the demographic structure, you are borrowing from the future," she said.

"If you look at it in terms of a political business cycle, it's another government that has to bear the costs."

POLISH TARGETS

Gulde said Poland's aim to cut its budget deficit to the EU's 3 percent ceiling by 2012 -- from an estimated 7.9 percent of GDP last year -- was positive, and a paper recommending extending a flexible credit line to Warsaw would be discussed by the IMF's executive board on Friday.

However, she said a move by Prime Minister Donald Tusk's government to shift pension payments from private accounts into state coffers and the lack of a defined structural reforms could complicate hitting that target.

"Although they've reaffirmed their 2012 fiscal target to the European Community, there is a need to define measures to achieve that and they have not been defined," she said.

"You can't just put a 3 percent goal out there and not have sufficient measures. They can't afford to have this uncertainty for long."

Facing a general election this autumn, Tusk's administration has largely eschewed painful austerity measures and has depended on revenue from the sales of state companies and other moves to cover its big budget deficit.

Gulde would not give details but said there was still "an undefined structural adjustment needed to meet the deficit-reduction programme target".

She added that the region stretching from the Baltics to the Black Sea was experiencing adjustment fatigue in which governments were struggling or dragging their heels on pursuing structural measures to cut their deficits.

"We are certainly concerned in all countries there is a tendency to do one-off measures. The structural reforms that would need to be taken with the return of growth, the momentum has been interrupted there," she said.

"Markets are focused on the West and (emerging European states) may have been able to fly under the radar, but if some domestic issue comes up or risk appetite changes, there are still some underlying vulnerabilities."