Bloomberg News

Hungary Probably Failed to Meet Bailout-Talk Terms, Eurasia Says

April 10, 2012

Hungary probably failed to meet European Union conditions to start aid talks as its legislative changes don’t sufficiently reduce government influence over independent institutions, Eurasia Group said.

Hungary has amended laws governing the judiciary and the data-protection authority and proposed changes to central bank regulations to allay European Commission concerns over their independence, which have blocked talks on an International Monetary Fund-led loan. The Cabinet sent its response to probes by the EU’s executive on March 30.

“While the government hopes this latest round of concessions will pave the way for a favorable opinion by the Commission and the start of formal negotiations on an EU/IMF program, we think this unlikely,” Mujtaba Rahman, a New York- based analyst at Eurasia Group, said in a note to clients today. The EU “continues to hold the bar high, suggesting agreement on pre-conditions still have some way to run.”

Prime Minister Viktor Orban has failed to meet EU conditions to start talks on a bailout close to five months after requesting aid as the forint fell to a record against the euro and the country’s sovereign credit grade was cut to junk.

The forint weakened 0.6 percent to 296.96 per euro at 3:06 p.m. in Budapest. The currency rose 6.1 percent against the euro this year after Orban pledged a quick agreement with the IMF in January. That allowed the forint to pare its 15 percent drop in the second half of last year, the biggest plunge in the world.

Ultimately, Hungary will probably manage to reach an agreement on an IMF loan even as slippage on meeting terms of a loan is “likely,” Rahman said. He put the likelihood of a failure to obtain aid at 35 percent.

‘Soon as Possible’

The European Commission has received all necessary documents from Hungary in relation to infringement procedures against the country, commission spokesman Olivier Bailly told reporters in Brussels today. The commission will analyze the documents “as soon as possible” and a decision on the procedures should be made in the coming weeks, he said.

The EU executive on March 7 took a formal step toward seeking a court order to require Hungary to redraft laws on the judiciary and data protection agency and asked for more information on planned changes to a new central bank law.

Hungary hopes the European Commission will only set the issue of central bank independence as its precondition for allowing aid talks to start, Gyula Pleschinger, an Economy Ministry state secretary and a member of the government negotiating team, told the news website Privatbankar in an interview published yesterday.

‘Direct Contradiction’

Separating the issue of central bank independence from the independence of the judiciary and the data-protection agency may allow the country to start talks in “a few weeks,” Pleschinger told the financial news website in an interview originally conducted on April 4.

“Fairly equal progress” need to be made on “all of the issues” as “no one area assumes more salience over any other, per se,” Rahman said. “This is in direct contradiction with the government’s belief.” He estimated that the European Commission may respond to Hungary by the end of April.

Orban, who also served as premier from 1998 to 2002, won a two-thirds majority in parliament in 2010 that allowed him to unilaterally change the constitution and reduce the power of independent institutions. The moves raised objections from the EU, the IMF, the U.S. and the United Nations.

Ruling-party lawmakers have ousted the chief justice of the Supreme Court and the data-protection commissioner, narrowed the jurisdiction of the Constitutional Court, replaced an independent fiscal council with one dominated by the premier’s allies and chosen a party member to lead the State Audit Office.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

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


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