By Win Thin

Hungary is making yet another tactical mistake, with Prime Minister Viktor Orban saying Wednesday that his government will discuss budget targets with the EU and not the International Monetary Fund.

He said that the IMF program expires in October, after which Hungary will no longer have to talk with the agency.

We think he is mistaken if he thinks the EU will give Hungary any money without an IMF seal of approval. Throughout this crisis, the IMF has taken the lead in negotiating aid programs and had the EU as a partner, but we see little chance of the EU dealing unilaterally with Hungary without the IMF on board.

Maybe it's just the "good cop, bad cop" ploy, but EU officials are saying the EU will continue working with Hungary to find a compromise.

However, this should not be taken by Hungary as a signal that the IMF has been cut out of the process altogether.

Don't forget, the October 2008 IMF/EU rescue package of $25.1 billion for Hungary was split as follows: $15.7 billion from IMF; $8.1 billion from the EU; and $1.3 billion from the World Bank.

We can safely say that the World Bank will give no money without the IMF on board, and IMF/World Bank money has provided the bulk of aid to Hungary.

We simply don't think markets will give Hungary a pass if it allows the IMF program to expire without having a new one lined up.

Local analysts say Hungary is posturing ahead of October local elections, but we do not think markets will give the country that much leeway.

The euro/forint currency pair (EUR/HUF) has surrendered much of its postweekend gains, but we are not on board the current forint rally. The 282.50 area offers a last bit of support ahead of the July 14 low around 277. Given continuing missteps by Hungarian officials, we think that the upside for EUR/HUF will again be tested and so are looking to re-establish a long EUR/HUF position. Our previous EUR/HUF position was stopped out for a profit after reaching our near-term objective of 290.5 (early June high).
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