Emerging Europe: Hungary’s central bank fights back

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Dominic O’Neill
Published on:

EU infringement process launched; Orban backs down

Andras Simor’s independence as Hungary’s central bank governor has moved to the centre of a highly charged clash between the European Union and Hungary’s populist prime minister, Victor Orban.

While much of the world was still enjoying the Christmas holidays, Hungary’s parliament rushed through measures to curtail the governor’s powers. At the same time, it passed measures to strengthen political appointees in the judiciary and enshrine a flat income tax rate into the constitution.

If the laws remain in place, another Orban-appointed deputy governor will be added to the monetary policy committee, and the central bank itself will become part of a new umbrella financial authority.

The worst outcome, says Morgan Stanley research, will be if relations with the EU and the IMF deteriorate so much – and the government’s funding situation becomes so dire – that Orban tries to appropriate central bank reserves to meet external obligations, and even stimulate the economy. If Hungary defaults, some fear it might empower the Jobbik party, which makes Orban’s Fidesz party look liberal.

Andras Simor’s position is crucial to the financial support Hungary is seeking from the EU and IMF

The international media spotlight fell on Hungary during street protests against Orban’s policies in early January. By the second week of the year the forint had fallen to record lows against the euro, with benchmark secondary sovereign bond yields rising to over 10%.

Simor’s position is crucial to the financial support Hungary is seeking from the EU and the IMF. Revision of the central bank law has emerged as the main precondition to a financing deal with the multilaterals.

The IMF says discussions for a new funding programme will only work if the EU approves it. Meanwhile, the European Commission has launched an infringement procedure against three Orban-led laws on the central bank, the judiciary and data protection. In late January, EC president José Manuel Barroso gave Orban a deadline of February 17 to remedy the EC’s concerns about the three laws.

Hungary has appeared to retreat. At a Euromoney conference in Vienna on January 18, economy minister Zoltan Csefalvay said his government understood the importance of inflation targeting and central bank independence. The minister said his government was willing to alter any aspects of the central bank law that were contrary to EU treaties. “We are interested to do it as soon as possible,” he said.

The forint has rallied and benchmark bond yields dropped back towards 9.5%. But investors are still wary. For the EU and the IMF, the wider precedent might be just as important as the immediate implications in Hungary. For Orban, there are the political costs of being seen to retreat. His approval ratings, according to one poll, have already fallen to 16%.

One banker in Vienna with experience of negotiating with the Orban government describes a deep personality clash between Orban – a former anti-communist campaigner – and the EU establishment that Barroso embodies. Negotiations in mid-December for a new EU economic treaty have caused more annoyance towards Hungary.