Ruling coalition faces minority government
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The Alliance of Free Democrats, a junior coalition party, announced it would withdraw from PM Ferenc Gyurcsany's socialist government following the sacking of Health Minister Agnes Horvath.
Hungary's junior coalition party said on Monday it would quit the government in protest at Socialist Prime Minister Ferenc Gyurcsany's refusal to back its economic reforms, but pledged not to force an early election.
Gyurcsany had earlier sacked Health Minister Agnes Horvath of the Alliance of Free Democrats following a defeat in a referendum on health reform this month, and said he would amend a law already passed by parliament to let private money into health insurance.
The end of the coalition, which has ruled Hungary since 2002, effectively signals the end of economic reforms and a period of political instability at a time when Hungary's currency and bonds are vulnerable to sharp market selloffs.
It may also seal the fate of Gyurcsany, who is at best a lame-duck prime minister and at worst a liability for his party.
"With his speech over the weekend, Ferenc Gyurcsany has backtracked ... from our coalition agreement. Therefore the Free Democrats do not wish to continue cooperating with the government in the form of a coalition," party leader Janos Koka told a press conference on Monday.
Koka said his ministers would withdraw on April 30 and appeared to suggest that his party would support a minority Socialist government from the outside.
"It is not the intent nor the interest of the Free Democrats to force early elections," he said.
Koka also said his party might change its mind on leaving the coalition if the Socialists, currently scoring just 15 percent in opinion polls, replaced Gyurcsany.
"For the first time in a long time the Free Democrats jointly stood up for the same cause ... It remains to be seen whether the Socialists will do the same for Gyurcsany; this will decide the final outcome," said political analyst Zoltan Somogy.
ELECTIONS A RISK
Early elections would almost certainly result in the Socialists being forced from power and the annihilation of the Free Democrats, who stand at just 1 percent support in surveys, far below the 5 percent threshold for entering parliament.
Gyurscany could either rule in a minority government or try to persuade at least four Free Democrats to join the Socialists, enough for an outright majority.
The Free Democrats have 20 members in the 386-seat parliament and the Socialists 190.
The forint hit a low of 261 to the euro on Monday after the political crisis broke, down from 257 on Friday, on concerns over the government and growing risks that European Union state would break its promises to cut the budget deficit.
It recovered to 259.35 when the central bank raised interest rates by a wider than expected 0.50 percentage points to 8 percent.
Nervous investors who hold billions of dollars' worth of Hungarian bonds are concerned about a possible return to overspending before the 2010 election.
Despite assurances by Gyurcsany that the government will stick to plans to cut the budget deficit, which it projects will fall to 3.2 percent of gross domestic product in 2009, few investors are in a forgiving mood because of past excesses.
Gyurcsany's Socialists and the Free Democrats won re-election in 2006 on the back of large tax cuts and spending rises, which resulted in the budget deficit ballooning to 9.2 percent of GDP, the largest in the EU.
"Whatever compromise is worked out, the policy outlook is poor. Not only has Gyurcsany lost the ability within his party to push ahead with reform, but he is also unlikely to have wider support for it," said Silja Sepping, an economist at Lehman Bros.
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