Hungary delays vote on central bank law

By bne IntelliNews June 5, 2012

bne -

Hungary postponed a parliamentary vote on amendments to its central bank legislation on June 4 following criticism from the European Central Bank (ECB) and insistence from the International Monetary Fund that it will not open talks on a loan programme with Budapest until it is satisfied with the changes. Coming on the back of a sharp slide in Hungarian stocks, bonds and currency late last week after Hungarian officials blasted the EU for trying to "dictate terms", investors are hoping that the move means Budapest is ready to finally play ball to negotiate a new bailout loan. However, comments from the ruling Fidez party remained ambiguous.

Antal Rogan, head of Fidesz party's parliamentary group, said parliament is now likely to vote on the bill before going into summer recess on July 15, Bloomberg reports. Mihaly Varga, Hungary's newly-appointed chief bailout negotiator, asked on June 2 for the vote to be delayed to allow the government time to consider the last-minute proposals from the ECB. Budapest promised to change the legislation (which was amended in January to tighten government control of the Magyar Nemzeti Bank) after the EU said it would drop infringement proceedings against Hungary and gave the green light to the bailout talks on April 25, but has since frequently insisted it will not respect all the requests.

The latest round of provocation from Prime Minister Viktor Orban came on May 31, and combined with the panic surrounding Greece, sank the forint to its weakest level against the euro in more than four months on June 1, after sliding 4.7% in May. It recovered by around 0.2% to 304.39 per euro on the news that the vote had been postponed, but the markets are clearly pushing for Budapest to make the final push to open bailout talks. "Our baseline is unchanged in that central bank act changes will occur at some point when forced by the market; we're not at that stage yet but nearing it," Peter Attard Montalto of Nomura wrote in a note.

Hungary's plans to expand the Monetary Policy Council and nominate a third vice president without consulting the central bank remain a concern, the ECB said. It is that issue more than any other that appears to concern the IMF and EU also. The IMF confirmed on May 31 that it has no date for the possible start of aid talks pencilled in, and is in touch with the Hungarian government on "actions needed" to ensure central bank independence, spokesman Gerry Rice said.

The failure to include all the demands and pass the amendment even has the EU pulling back from what has been an extremely concilatory stance over the past month or so. European Commission spokesman Olivier Bailly told reporters: "We want these clarifications to be fully made. This lifting of the infringement will be done provided that the national law on the central bank is fully amended."

However, few expect Budapest to move quickly to meet the demands, preferring instead to continue to play for time, offering further proof that the government has little real inclination to negotiate a new loan programme - and comply with the attached conditions - but is instead merely dangling the prospect in a bid to keep the markets off its back until the crisis pulls back far enough to reopen access to reasonably priced debt.

Reflecting that, a Hungarian official followed up news of the delayed vote by claiming on TV that Budapest is open to more changes to the central bank law to boost the MNB's independence, but held back once again from specifying the exact changes. Peter Szijjarto, state secretary at the prime minister's office, told M1 that Hungary will compromise "within the bounds of reason" regarding a planned increase in the number of policy makers and the nomination of a third vice president at the central bank.

On June 3, spokesman Andras Giro-Szasz reiterated that the government won't make concessions on its "sovereignty" or national interest for an aid agreement, and claimed that delays to starting talks on the bailout were caused by the EU's slow decision-making.

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