BUDAPEST (Reuters) - Hungary’s parliament is expected to defy IMF and EU objections on Friday by passing its new central bank law, piling doubt on whether the government can reach a new funding deal with its international lenders.
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.
It is uncertain whether negotiations with the lenders will start at all in January, after the IMF said on Wednesday the government should work with it on policy issues such as the central bank law if it wants talks to progress.
Hungary needs a new financing deal to back up investors’ confidence and help retain its access to market funding next year when it has to refinance 4.8 billion euros worth of foreign currency debt, including repayments of a 2008 IMF/EU bailout.
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.
Fidesz has amended the law to address most complaints from the European Central Bank, but has not backed down on a planned boost in the number of rate-setters and vice governors that critics say the government could use to influence monetary policy.
The central bank’s governor has said any extra members for the Monetary Council were superfluous and the new vice governor would be a “political commissar.
The government has criticised the central bank and Governor Andras 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 emphasised the government’s central bank policies when it cut Hungary’s debt rating to speculative, following a similar move last month by Moody’s.
Analysts said the central bank law was both a symbol of the wider legal disagreements between Hungary and its partners, and a key piece of the unorthodox policy mix that the government claims will boost economic growth.
Other government measures that have baffled investors have been windfall taxes on banks and other big business sectors, and a takeover of private pension funds assets earlier this year.
Passing the central bank bill in its current form will create more hurdles in the EU/IMF negotiations, increase market volatility in 2012 and perhaps trigger sanctions, analysts said.
“This process will in no way soothe markets,” Concorde Securities economist Janos Samu said. “A (new financing) deal is in everyone’s interest so ultimately we do expect one, but the forint could well set new record lows before we get there.”
He said the IMF would be an easier negotiating partner while the EU, where Hungary’s ties are deeper and the web of interests more intricate, may prove tougher to come to terms with.
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.”
Reporting by Marton Dunai; Editing by Ruth Pitchford