Hungary passes contentious central bank law

Parliament approves law seen as increasing political influence over central bank, in move seen as contrary to EU laws.

Hungary parliament
Opponents of Orban’s government say it is using its majority in parliament to pass undemocratic laws [AFP]

Hungary’s parliament has approved a controversial central bank law that may affect upcoming talks with the International Monetary Fund (IMF) and European Union about financial support.

Parliament approved the law on Friday, which increases political influence over the bank, after adopting several modifications to comply with requests from the European Central Bank (ECB).

The new law gives the prime minister the power to name the central bank’s three vice-presidents. Earlier, the bank’s president nominated his two deputies.

The country’s monetary council, which sets interest rates, will be expanded from seven to nine members, and their nominations have now been routed through parliament.

The law, vigourously pursued by Prime Minister Viktor Orban, was approved by an overwhelming majority of 293 to 4.

“Nobody can interfere with Hungarian legislative work, there is no one in the world who might tell the elected deputies of the Hungarian people which act to pass and which not to,” Orban said on public radio ahead of the parliamentary session.

Ahead of the vote, Antal Rogan, a member of Orban’s ruling Fidesz party, said: “This law strengthens the independence of the central bank.”

He said that the legislation would “guarantee the independent functioning of the Monetary Council and the central bank”.

‘Government influcence’

Another law approved on Friday paves the way for a merger between the country’s national bank and its financial regulator.

Rogan said the government would not push through the merger during the current term of National Bank of Hungary President Andras Simor, which ends in early 2013.

A statement from the National Bank of Hungary released ahead of the vote said that the changes “endanger the stability of the Hungarian economy and therefore gravely damage our national interests”.

“The new laws … open the way for the influence of government and political party interests on central bank decisions,” the bank said. “This … is counter to the basic treaty of the European Union.”

The ECB has already voiced its concerns about the independence of Hungary’s central bank, and EU and IMF officials left talks earlier this month saying that any bailout would be difficult to arrange if the legislation was to pass.

“We will be assessing the legal scope of the new laws,” a spokesman for the EU’s executive arm told the AFP news agency after the law passed.

“We have reiterated our concerns to the Hungarian authorities in the past few days. Of course the [European Commission] remains open to help Hungary in fully implementing EU law.”

Orban, meanwhile, has suggested that negotiations for a financial bailout from the IMF are “important but not crucial”.

“If the IMF gives us a safety net, we will face the next period with greater self-confidence and greater security, but if such an agreement is not reached, we will be able to stand on our own feet,” he said.

Bond concerns

Hungary’s ability to tap bond markets is in fresh doubt after a set of auctions on Thursday that saw the yield on five- and 10- year bonds rise almost a full percentage point to as high as 9.7 per cent in some cases.

High interest rates on bond indicate that investors consider the risk of the country defaulting on its debts to be higher.

In late 2008, Hungary became the first EU country to turn to the IMF for a bailout, receiving a $26bn standby loan to avoid bankruptcy.

Orban chose not to renew the loan in 2010, opting instead for market financing and to keep the IMF out of government economic policies.

The government has imposed taxes on banking, energy, telecommunications and other sectors, as well as nationalising about $14bn in assets managed by private pension funds, all moves that would have been in contravention of IMF conditions.

Tamas Fellegi, a cabinet minister in charge of Hungary’s current round of negotiations with the IMF, is due to meet with officials from the fund, including Managing Director Christine Lagarde, during a visit to Washington in the first half of January.

Source: News Agencies


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Published On 25 Aug 2011
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