Since 2006, Hungary has brought its deficit down to about 3.8 percent of economic output, from 9 percent — an impressive policy achievement that has also taken a deep social toll. Unemployment is 11 percent, and retail sales are shrinking. Adding to Hungary’s woes, 1.7 million people in a country of 10 million hold foreign loans that have become increasingly difficult to repay because of the forint’s weakness against the euro and the Swiss franc.
Mr. Orban has won political backing by insisting that enough is enough. He has announced plans to reverse a recent increase in the retirement age, proposed a one-off tax on the country’s banks and trumpeted a mini-stimulus called the Szechenyi Plan in honor of Istvan Szechenyi, a 19th-century reformer who pushed what was then a backward Hungry to modernize and grow.
Mr. Orban says he can meet the I.M.F.’s target of 3.8 percent this year. But next year, when Hungary is supposed to bring its deficit below 3 percent, is another matter.
“The big problem is 2011,” said Christoph B. Rosenberg, who led the fund in its talks with Hungary. “Given Hungary’s high debt level and its vulnerability to financial flows, it is important that they reduce the deficit from this year’s level.”
So far, the markets have been fairly tolerant. Rates at government auctions have increased, and the forint has weakened by about 4 percent, but there has been no panic yet.
“Investors think that Hungary and the E.U. will do a deal,” said Peter Attard Montalto, a fixed-income analyst at Nomura Holdings. “But we don’t think the E.U. will do a deal without the I.M.F. at the table.”
In many respects Mr. Simor, a former chairman of Deloitte & Touche in Hungary, is the perfect foil for Mr. Orban’s government and its nationalist approach.
“I think they will go after him,” said Gyorgy Lazar, a Hungarian-American investor who writes frequently on Hungarian financial matters. “These guys are from the countryside,” he said, of the new administration, as opposed to the “refined intellectual sensibilities of the Budapest elite” that Mr. Simor represents.
Mr. Lazar’s view, one that is shared by the Orban camp, is that Mr. Simor’s high interest rate policy is primarily to blame for Hungary’s current economic woes. “Thousands of businesses have gone bankrupt, industries have suffered,” Mr. Lazar said. “He should have reduced interest rates faster.”
The central bank’s 5.25 percent benchmark rate is among the highest in Europe. But Mr. Simor argues that high rates are still needed to maintain the confidence of the foreign investors that Hungary, with its punishing debts, is so reliant on.
In an interview, Mr. Simor would not comment on his tense relationship with Mr. Orban, who he has not yet met since the change in government.
But in the recent release from its monetary council, the bank made clear its disappointment with the breakdown in talks with the I.M.F. and the European Union.
“The I.M.F./E.U. umbrella was very important in keeping the confidence of foreign investors,” Mr. Simor said. “Giving up this umbrella increases the vulnerability of the Hungarian economy.”