Bloomberg News

EU Steps Up Pressure on Hungary as Cabinet Seeks Bailout Talks

January 12, 2012

Jan. 11 (Bloomberg) -- The European Union escalated its standoff with Hungary, keeping bailout talks on hold and threatening to cut subsidies as punishment for flouting the bloc’s rules on central-bank independence and deficit overruns.

The European Commission may take Hungary to court for possibly violating EU laws on the independence of the central bank, the judiciary and the data protection authority, the EU’s executive said today in separate statements. The Commission will decide on Jan. 17 whether to start legal proceedings.

Hungary is trying to revive bailout talks with the EU and the International Monetary Fund after the organizations suspended them last month on concern a new central bank regulation violates monetary policy independence. Fitch Ratings on Jan. 6 followed Moody’s Investors Service and Standard and Poor’s in downgrading Hungary’s sovereign-credit grade to junk.

“The commission remains preoccupied that a number of the new provisions may violate EU law,” the commission said. “Without prejudging the final outcome of this analysis, the commission is committed to fully use all its powers to analyse the compatibility of national law with EU law and reserves the right to take any steps that it deems appropriate, namely the possibility of launching infringement procedures.”

The forint weakened 0.1 percent against the euro to 310.97 at 3:06 p.m. in Budapest. The forint has lost 14 percent against the euro in the past six months, the worst performance among more than 170 currencies tracked by Bloomberg.

Fund Suspension Threat

EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters today he will meet Hungarian minister Tamas Fellegi next week in “preparatory, informal” meetings on Hungary’s bailout. Fellegi is in Washington this week to meet IMF officials on Hungary’s request for a bailout.

Hungary may face the suspension of so-called cohesion funds from next year if it fails to correct its budget policies, Rehn said.

Hungary’s budget sustainability underwent a “severe deterioration” last year, which was masked by one-time measures, the commission said today. Hungary has failed to take “effective action” to rein in the budget deficit in a “sustainable nature.”

“Although in 2011, Hungary formally respected the 3 percent of GDP reference value, this is only thanks to one-off measures worth some 10 percent of GDP,” the European Commission said in a report. “This budgetary outcome masks, however, a severe deterioration in the underlying structural balance.”

Orban’s Measures

Prime Minister Viktor Orban effectively nationalized $12 billion of private pension funds and levied extraordinary taxes on energy, financial, retail and telecommunication companies to plug budget holes from tax cuts that failed to boost economic growth. Gross domestic product may expand 0.5 percent this year, the slowest in the eastern European Union, the commission said on a Nov. 10.

The shortfall without one-time measures reached 252 percent of the government’s initial year-end target, the Economy Ministry said on Jan. 9. The government can meet its 2.94 percent of GDP goal for 2011 thanks to pension-fund revenue, the ministry said.

The commission recommends moving to the “next stage” of its excessive-deficit procedure. The commission will propose to the EU’s Council of Ministers to decide that Hungary has failed to rein in the budget deficit below 3 percent of GDP in a “sustainable” manner and if the council agrees, to issue new budget recommendations for the country.

Hungary is ready to discuss measures proposed by the European Commission and will reduce its budget deficit to below 3 percent of GDP in 2012 and 2013, the Economy Ministry said in an e-mail today.

--With assistance from Patrick Henry in Moscow. Editors: Balazs Penz, Andrew Langley

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Jones Hayden in Brussels at jhayden1@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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