(Updates with markets in sixth paragraph.)
Jan. 3 (Bloomberg) -- The European Union said it has no plans currently to resume financial aid talks with Hungary after Premier Viktor Orban rejected requests to withdraw a new central bank regulation.
The EU and the International Monetary Fund broke off talks on a financial aid package last month after Orban’s lawmakers, who have a two-thirds parliamentary majority, pushed ahead with the adoption of the central bank law, which the Budapest-based Magyar Nemzeti Bank said undermines its independence.
“For the time being there’s no plan on our side to come back to Budapest,” European Commission spokesman Olivier Bailly said today in Brussels. “One key element of our assessment is of course not only the financial element that we need to discuss with the Hungarian authorities, but also the legal environment that is necessary to ensure financial stability in Hungary.”
Hungary, an EU member since May 2004 that has yet to adopt the euro, received its second sovereign-credit downgrade to junk in a month when Standard & Poor’s followed Moody’s Investors Service in stripping the country of its investment grade on Dec. 21. Orban rejected European Commission President Jose Barroso’s request to withdraw the central bank law, which is part of the new constitution that took effect on Jan. 1.
Tens of thousands of Hungarians protested in Budapest yesterday against the new constitution, which they said helps Orban extend his influence over the central bank, the judiciary and the media and changes election rules in his favor. The basic law completes a transition from communism to democracy, Orban told the Magyar Nemzet newspaper in a Dec. 24 interview.
The forint weakened 0.5 percent against the euro to trade at 315.6 per euro at 3:49 p.m. in Budapest, nearing its record low of 317.92 reached on Nov. 14. The forint dropped 16 percent against the euro in the second half of 2011, the worst performance among more than 170 currencies tracked by Bloomberg.
The government sold three-month Treasury bills today at a yield of 7.67 percent, the highest since 2009. The yield on 10- year forint-denominated bonds rose 23 basis points to 10.33 percent, according to generic prices compiled by Bloomberg. The yield climbed 43 basis points, or 0.43 percentage point, in the past two days.
“Hungary is under growing pressure and all elements of an explosive mix are present,” Gabor Ambrus, a Sofia-based economist at 4Cast Ltd., said in an e-mail. “Whether this means a change of prime minister, the appropriation of central bank reserves, default or some other option, remains to be seen. There is no way to predict which way the explosion can tear the social, political and economic fabrics down.”
The central bank raised the benchmark interest rate by a half-point for a second month on Dec. 20 to 7 percent, the EU’s highest. Policy makers said they may have to raise it again if risk perception worsens “substantially.”
Orban shunned IMF aid after taking office in 2010 to protect what he called “unorthodox” measures from oversight. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget. There was a deficit of 182 percent of the Cabinet’s full-year target at the end of November.
The government forced banks to swallow losses on foreign- currency household mortgages, prompting foreign-owned banks including Erste Group Bank AG and Raiffeisen Bank International AG to recapitalize their local units, cut lending and close bank branches.
Hungary wants to use part of the central bank’s foreign- currency reserves to repay 187 billion forint of debt amassed by counties that the government assumed last year and to inject capital into the economy, news website Index reported today, citing unidentified people close to the government.
The central bank doesn’t comment on “market rumors,” the press department said in an e-mail. Hungary isn’t planning to use the central bank’s foreign-currency reserves to stimulate the economy, the Economy Ministry said in a statement published on the MTI newswire. The statement didn’t address Index’s report that the government may use the central bank’s reserves to repay county debt.
Last week, Janos Lazar, the head of the ruling party’s parliamentary group and mayor of the southeastern city of Hodmezovasarhely, said his municipality doesn’t recognize the entire amount of its Swiss-franc denominated outstanding debt and said Erste must share in the exchange-rate loss.
“We currently estimate that the whole economy will have about 14 billion euros ($18.2 billion) in external financing requirements” this year, Gyula Toth, a Vienna-based strategist at UniCredit SpA, said in an e-mail. “In the case of no IMF deal and no Eurobond, borrowing needs could be covered by foreign-currency reserves, which would decline by about 13 percent. This, in turn, could undermine local confidence in the currency and capital flight could intensify.”
Hungary’s economy may grow at the slowest rate with the highest public debt level this year among the EU’s eastern members, according to the European Commission’s forecasts published in November. The public debt level rose to 82.6 percent of gross domestic product at the end of the third quarter, from 76.8 percent at the end of the second quarter, the central bank said yesterday.
Orban has been reducing the power of independent institutions and asserting his influence since winning elections in 2010, ignoring objections from the U.S. and the United Nations.
Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.
One judge, Tunde Hando, the wife of Jozsef Szajer, a European Parliament member from Orban’s Fidesz party, will be responsible for naming all new judges, including replacing scores who were forced into retirement last year.
“We have significant and well-founded concerns,” U.S. Secretary of State Hillary Clinton wrote in a Dec. 23 letter to Orban, according to Nepszabadsag newspaper, which published the letter in Hungarian on Dec. 30. She called on Orban to protect individual liberties and checks and balances, Nepszabadsag said.
--With assistance from Jim Brunsden and Peter Chapman in Brussels. Editors: Alan Crosby, Alan Crawford
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