Hungary's minority Socialist government will struggle to implement any meaningful economic reforms in the remaining two years of its term after its liberal allies quit the coalition. Early elections, which would probably see the Socialists lose power and the smaller Alliance of Free Democrats wiped out, are not expected. However, investors are likely to punish policy slippages due to Hungary's record of racking up budget deficits. “We do not believe that any reform progress is realistic for the remaining two years of the current government even if the coalition parties reach an agreement on further cooperation,” said Citigroup economist Eszter Gargyan. The forint lost around one percent of its value against the euro, the currency Hungary hopes to join, as the political crisis broke on Monday and was trading at 261.5 to the euro early on Tuesday, at its weakest level this week. The Free Democrats said on Monday they would quit the government in protest at Socialist Prime Minister Ferenc Gyurcsany's refusal to back their economic reforms, but pledged not to force an early election. The European Union nation of 10 million people has a track record of heavy pre-election spending and has lost ground to other countries in eastern Europe by failing to reform its sclerotic and overmanned state. The tax take of the government is the third highest in the European Union, according to a recent OECD study, and economic growth is among the lowest in the EU at just 1.3 percent in 2007, compared with over 10 percent in neighboring Slovakia. Gyurcsany's government promised reforms but delivered few of them after he spent his way to re-election in 2006 and racked up a budget deficit of 9.2 percent of gross domestic product, the biggest in the EU. Post-election tax rises and subsidy cuts mean the deficit is now on track to be cut to 3.2 percent of GDP in 2009, close to the 3 percent level required for euro membership, but more economic reforms are needed to make those cuts sustainable. It was the issue of health reforms that pushed the coalition apart on Monday after Gyurcsany backtracked on plans promoted by his coalition partner under pressure from his Socialist Party, whose poll ratings stand at just 15 percent. Although the two parties will not formally split until April 30 and indicated they are willing to discuss a new coalition agreement, there seems little prospect of fixing the alliance. “As of April 30, this coalition government will end... After that, I think a minority government has the highest chance right now,” Free Democrat Chairman Janos Koka said late on Monday. Gyurcsany's Socialists need the support of the 20 Free Democrats for a stable coalition. Their withdrawal leaves the 190-strong Socialist camp in parliament in a minority as it needs 194 seats for a majority. Gyurcsany will also struggle to keep his party in line, political analysts said. “It's clear that the prime minister has no long-term or medium-term plan as he doesn't even seem to have a plan for today,” said Andras Giro-Szasz political analyst at the Szazadveg Institute. __
