Hungary moves to reduce independence of central bank

By bne IntelliNews December 15, 2011

bne -

The ongoing fight between the Hungarian government and the central bank was ratcheted up a notch on December 14 as the ruling Fidesz party submitted a draft bill aimed at merging the Magyar Nemzeti Bank (MNB) with the financial regulator to create a new institution, with its governor Andras Simor demoted to joint deputy head. The move comes despite - or even in anticipation of - the likelihood that the International Monetary Fund (IMF) will call for a guarantee on the independence of the central bank in forthcoming negotiations over financial aid to the country.

According to a draft bill posted on the parliament's website, the government is also seeking to expand the rate-setting Monetary Council to as many as nine members from the current seven. Meanwhile, Simor - alongside Karoly Szasz, who currently heads the financial regulator - will become deputies to a head appointed by the president. The bill "represents a shift in emphasis in the sense that the decision and execution powers concentrated in the hands of the central bank president will now be divided between the Monetary Council and a newly created board," the draft bill says. Parliament, in which Fidesz holds a two-thirds majority, will vote on the proposal on December 16.

Prime Minister Viktor Orban has been at loggerheads with Simor since he took power in 2010, and earlier this year stripped the central bank governor of his right to nominate two of the four outside members for the Monetary Council. The governor's salary was also cut by 75% despite criticism from the European Commission and the European Central Bank.

For his part, Simor said in March that he would resist "bullying" by a government official to quit before his mandate expires in 2013. Things have been quieter through the second half of the year, but simmering tensions bubbled to the surface as the Monetary Council raised its policy interest rate to 6.5% in November. The central bank has also criticized government economic policy and budgetary targets in the last week.

The governemnt's move against the central bank is unlikely to impress the European and global institutions that Budapest is due to start negotiations with over a financial aid package in January - although despite a slight drop in the forint as the news emerged, it's unlikely to upset the financial markets too much, as they have so much else to think about in Hungary right now. However, the likely effect on the negotiations with the IMF and EU will concern them.

Whilst Hungary has been insisting it wants a €20bn package without accepting conditions from the lenders, the IMF has remained tight-lipped. Most expect lenders to insist on strict conditions - especially in return for such a huge sum - which include a halt to the government's "unorthodox" economic policies such as the crisis taxes it has imposed on several sectors and the early repayment scheme for foreign currency mortgage borrowers, which have forced the banks to shoulder large losses. Respecting the independence of the central bank and other Hungarian institutions is expected to figure high on the list of conditions.

This latest attempt by the government to reduce the power of the central bank is adding grist to the mill that Hungary has no genuine intention of agreeing a financial aid package, but is "doing a Turkey" - holding off the markets and ratings agencies through protracted talks over a bailout loan, in the meantime hoping it can emerge on the other side of the crisis without having to agree to austerity measures and other conditions.

However, others argue this is simply part of Hungary trying to turn its perceived weakness - an erratic and obstinate government - into a strength ahead of the talks.

In another example of the government's obstinacy, on December 13 the Fidesz-controlled parliament approved a judicial overhaul that will oust Supreme Court Chief Justice Andras Baka. Since coming to power in 2010, PM Orban has already reduced the jurisdiction of the Constitutional Court, written a new constitution, replaced an independent Fiscal Council with one dominated by allies, created a media regulator led by ruling-party appointees, and put a member of Fidesz in charge of the State Audit Office.

The move to reduce the independence of the central bank - the bill will also see the number of vice presidents expanded to three (from the current two) and allow the Monetary Council to decide on their responsibilities - may just be another bargaining chip that the Hungarian delegation could hand back to the IMF when it demands conditions.

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