Tags: Hungary | Bank | Law | IMF | EU

Hungary Approves Central Bank Law in Showdown With IMF, EU

Friday, 30 Dec 2011 10:12 AM

 

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Hungary’s chances of obtaining a bailout receded after lawmakers approved new central bank regulations that prompted the International Monetary Fund and the European Union to break off talks this month.

Parliament in Budapest stripped central bank President Andras Simor of his right to name deputies, expanded the rate- setting Monetary Council and created a position for a third vice president. A separate law approved earlier today makes it possible to demote the central bank president if the institution is combined with the financial regulator.

Hungary received its second sovereign credit downgrade to junk in a month when Standard and Poor’s followed Moody’s Investors Service in taking the country out of its investment grade category on Dec. 21. The forint has fallen 15 percent against the euro since June 30, making it the world’s worst- performing currency in the period.

“The approval of the central bank law shows the government isn’t serious about obtaining an IMF loan,” Gabor Orban, who helps manage $2.5 billion at Aegon Fund Management in Budapest, said in a phone interview. “The government is floating the possibility of an IMF deal but in reality it’s playing for time, hoping the global economy will improve and make a bailout unnecessary.”

The forint weakened 0.3 percent against the euro and traded at 311.1 per euro at 10:15 a.m. in Budapest. Hungary raised less than half as much as planned at a debt auction yesterday as borrowing costs surged to the highest in more than a year and the state rejected all bids for three-year notes. The 2022 bond’s yield was 9.7 percent.

‘Seriously Harm’

The new central bank regulations “seriously harm” the country’s national interest, allow for political intervention in monetary policy and threaten economic stability, the Magyar Nemzeti Bank said today. The laws have led to the “indefinite postponement” of talks on a financial aid package, the central bank said in a statement posted on its website.

While a possible Hungarian agreement with the IMF and the EU on an assistance package would boost confidence, the Cabinet can do without it, Prime Minister Viktor Orban told MR1 radio in an interview today.

“If we have an IMF safety net, then we face the coming period with greater self-confidence and greater security,” Orban said. “If we don’t reach an agreement, we’ll still stand on our own feet.”

Yields Soar

The government asked for IMF aid last month to ensure financing next year as yields soared, debt auctions fell short of targets, the forint weakened to a record against the euro and S&P signaled a potential downgrade. An IMF-led aid package would bolster Hungary’s policy credibility, S&P said on Dec. 21.

Hungary will have the highest debt level and slowest economic growth among the EU’s eastern members next year, the European Commission forecast on Nov. 10.

Tamas Fellegi, the Hungarian minister in charge of negotiations, will travel to Washington in the first half of January to hold “informal” talks with IMF Managing Director Christine Lagarde and other fund officials, the MTI newswire reported, citing Fellegi’s press office.

Orban shunned the IMF aid after taking office last year to protect what he called “unorthodox” measures from oversight. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget, which had a deficit of 182 percent of the Cabinet’s full-year target at the end of November.

Hindering Growth

Hungary also forced banks to swallow losses on foreign- currency mortgages. The measures may hinder economic growth and are “likely to depress investment and job creation in the short term,” S&P said.

The IMF and the EU have yet to decide on resuming talks with Hungary. Negotiations can’t resume until Hungary indicates it’s ready to accept policy conditions as part of a stand-by arrangement, Reuters reported on Dec. 28, citing Christoph Rosenberg, the IMF mission chief to Hungary.

The European Commission hasn’t decided whether to resume financial-aid talks with Hungary, the EU executive’s representative in Budapest, Tamas Szucs, said in a Dec. 22 e- mail. The commission will decide after reviewing Hungary’s replies on concerns including the central bank law and the country’s judicial overhaul, Pia Ahrenkilde-Hansen, a Brussels- based spokeswoman, said on Dec. 23.

Court Fight

Hungary is ready to contest the European Commission in the courts over differences on the new central bank regulation, Orban told MR1 in an interview today. While Hungary has agreed to most of the changes demanded by the EU, differences remained on two points, he said.

The government stuck to expanding the number of rate- setting council members to as many as nine from seven to expanding the number of vice presidents to three from two.

Orban has been reducing the power of independent institutions and asserting his influence since winning elections last year, bucking objections from the U.S. and the United Nations.

Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.

One judge, Tunde Hando, the wife of a ruling party member, will be responsible for naming all new judges, including scores who will be forced into retirement at the end of this year.

“We have significant and well-founded concerns,” U.S. Secretary of State Hillary Clinton wrote in a Dec. 23 letter to Orban, according to Nepszabadsag newspaper, which published the letter in Hungarian today. Clinton called on Orban to protect individual liberties and checks and balances, Nepszabadsag said.

© Copyright 2014 Bloomberg News. All rights reserved.

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