Hungary to Approve Central Bank Law Opposed by EU, IMF

Hungary is expected to defy IMF and EU objections on Friday by adopting its new central bank law and the government will go to court if needed to defend its position, adding to doubts about the chances of a new funding deal.

Adam Jones | Digital Vision | Getty Images Budapest, Hungary

The legislation was a key sticking point earlier this month in informal talks with the International Monetary Fund and the European Union, who say it would crimp central bank independence. Hungarian Prime Minister Viktor Orban refused an EU request to withdraw the bill, saying the country would not take orders from Brussels. 

Orban told public radio on Friday that Hungary has changed the bill to fit the expectations of the European Central Bank in all but two points, but it would go to court to defend those two points.

The ECB asked the government to reconsider boosting the ranks of the rate-setting Monetary Council and the number of deputy governors, which it said could allow undue government influence over central bank policy. 

Hungary kept those points in the bill that awaits the vote.

"The ECB had 15 proposals, and the relevant Parliament committee adopted 13 in good conscience," Orban told public radio mr1. "In two points the difference of opinions remains, and if necessary we will defend [our position] in a legal procedure."

"It is a European fashion that the central bank must be in a sacred state of independence," he added. "Every time there is a hint of government influence the nerve endings jerk, sending a signal all the way to Brussels."

Under pressure from markets over an unorthodox policy course that has targeted short-term windfalls from the pension and banking sectors to right public finances, Orban's cabinet requested EU and IMF aid earlier this month.

But anger at further moves to reinforce the government's hand at the central bank prompted officials to leave Budapest early, casting doubt on the chances of a deal.

The IMF itself said on Wednesday the government would need to agree to discuss disputed policy issues including the central bank law if it wants talks to begin at all. 

Orban said there was no precise timetable for the talks but added they would start at the beginning of January, and reiterated that the talks were not indispensable.

"If the IMF gives us a safety net we will begin the forthcoming period with more confidence, but if an agreement is not born, we can still stand on our own two feet."

Many commercial bank analysts do not agree, saying Hungary needs to come to terms on a deal to restore investors' confidence and ensure it has access to market funding next year when it has to refinance 4.8 billion euros

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[EUR=X  Loading...      ()   ] worth of foreign currency debt, including repayments of a 2008 IMF/EU bailout.

The state debt agency cancelled a three-year bond tender on Thursday for the first time since the 2008 financial crisis.

Political Commissar

Parliament, where the ruling Fidesz party has a two-thirds majority, is expected to pass the central bank bill smoothly. That could add to pressure on the forint, which fell to a one-month low on Thursday, hit by a scrapped bond auction.

Central bank governor Andras Simor has said any extra members for the Monetary Council were superfluous and the new vice governor would be a "political commissar."

The government has criticized the central bank and Simor for recent rate hikes and for not doing enough to boost the economy, which faces possible recession next year.

Parliament has also opened up an option to merge the central bank with the financial market regulator, potentially demoting Simor.

Credit rating agency Standard & Poor's emphasized the government's central bank policies when it cut Hungary's debt rating to speculative, following a similar move last month by Moody's. 

Nomura analyst Peter Attard Montalto said punitive action from the ECB was also plausible down the line.

"The ECB... may well say they will launch a (European Court of Justice) case against Hungary," Montalto said.

"ECB action... could include withdrawing swap lines from Hungary and even perhaps some shifts in rules on accepting Hungarian euro debt as collateral."