Bloomberg News

Diary of a Central Banker in Despair in Orban’s Hungary

April 19, 2012

Andras Simor, president of the Magyar Nemzeti Bank, Hungary's central bank, is one of the few who have withstood Orban’s assaults. Phtographer: Akos Stiller/Bloomberg

Andras Simor, president of the Magyar Nemzeti Bank, Hungary's central bank, is one of the few who have withstood Orban’s assaults. Phtographer: Akos Stiller/Bloomberg

Andras Simor is Hungary’s last man standing.

The central bank president has held on as Premier Viktor Orban swept out the heads of independent state institutions during the past two years. Parliament cut Simor’s salary by 75 percent, stripped him of his right to name rate setters and filled the majority of the seats with ruling-party appointees.

He remains in office, protected by the European Union, which blocked bailout talks in December to get Hungary to reverse legislation weakening the central bank’s independence. To Ewald Nowotny, head of Austria’s central bank, the fight over Simor, 57, has become a fault line in the clash between European values and national politics.

“The Hungarian central bank under his leadership is one of the few remaining independent institutions in Hungary,” said Nowotny, a member of the European Central Bank’s Governing Council, in an April 5 phone interview. “At stake is the concept of an independent central bank and that is a basic concept of European law.”

The EU, the International Monetary Fund and Hungary haven’t begun negotiations over the bailout that Orban, 48, requested in November, as the forint fell to a record and the country lost its investment credit grade after 15 years. The European Commission, the EU’s executive body, says talks won’t start until Hungary changes the law to ensure monetary policy independence.

Government Meddling

“When we start to see a government really meddling with the central bank, taking exception to specific people and trying to replace them or clip their power, then we get worried,” Kieran Curtis, who oversees about $3.8 billion in emerging- market assets at Aviva Investors Ltd. in London, said by phone.

That’s not the only condition as the commission also is demanding changes to laws governing the judiciary and the data- protection office, whose independence the EU also considers to be under threat.

Waning investor optimism about Orban’s willingness to reduce his influence over independent institutions has weakened the forint 3.9 percent against the euro in the past two months. The currency plunged 15 percent in the second half of last year, the most in the world, before paring losses after the government pledged Jan. 5 to reach a quick deal on an IMF loan.

The Cabinet filed changes on April 17 to the central bank law that failed to address all the objections of the EU or the ECB. Simor’s pay cut and the planned enlargement of the rate setting Monetary Council are among the issues left out of the amendments. The Cabinet has agreed to scrap an option to demote the central bank president if the central bank is combined with the financial authority.

Day-to-Day Policy

Orban’s government has also clashed with the central bank over the conduct of day-to-day monetary policy.

Policy makers under Simor have kept the benchmark interest rate at the highest level in the EU, citing the need to protect the forint amid the euro debt crisis and to rein in the fastest inflation in the 27-nation bloc.

The central bank “impedes Hungary’s healthy economic growth,” the Economy Ministry said on Dec. 20, after the Magyar Nemzeti Bank raised the main rate by a half-point to 7 percent following the breakdown of preliminary bailout talks.

The government has rejected claims that its new regulation of the central bank seeks greater government control.

“The central bank has been independent, it’s independent and it will remain independent,” Economy Ministry State Secretary Zoltan Csefalvay said in an April 18 interview in London. “Central bank independence in Hungary is very important.”

‘Total Takeover’

Simor, who in December called the new law a government attempt at a “total takeover” of the central bank, is one of the few who have withstood Orban’s assaults.

Adam Farkas, who headed the independent financial regulator, resigned within a month of Orban taking office on May 29, 2010, citing a lack of confidence from the government. Gyorgy Kopits, the then-head of the independent Fiscal Council, which criticized budget policy, was pushed out after the Cabinet severed funding of the agency and set up a new body dominated by Orban’s allies.

The head of the Supreme Court, Andras Baka, was removed last year along with data-protection commissioner Andras Jori, after the government overhauled their institutions.

The head of the Constitution Court, Peter Paczolay, stayed on after the government stripped the panel of its jurisdiction over economic issues, including on the Cabinet’s imposition of taxes retroactively. The court also failed to rule on the nationalization of $13 billion of private pension funds.

Salary Reduction

Simor didn’t escape unscathed. Last year, he was stripped of his right to nominate two of the four outside members in the Monetary Council, allowing the ruling party to fill a majority of the seven-member body with its appointees. Parliament also cut Simor’s salary to 2 million forint ($8,833) a month.

Simor said last March that he rejected intimidation by a government official to quit before his mandate expires in 2013.

“A central bank president won’t be threatened or bullied into resigning,” Simor told reporters on March 7, 2011. He declined to comment for this article, his press office said.

Simor, born in Budapest in 1954, was trained as an economist specializing in international finance at the capital’s elite Corvinus University, named after Karl Marx under communism. After graduating, he got his first job in 1976 in the central bank’s foreign currency department.

Creditanstalt to Deloitte

He worked for the bank in London from 1979 to 1985. After the country’s transition from communism to democracy in 1990, Simor headed the brokerage Creditanstalt Ertekpapir Rt. in Budapest, now part of Vienna-based UniCredit Bank Austria AG. He went on to become president of the Budapest Stock Exchange and later Deloitte & Touche LLP in Hungary. He was appointed head of the central bank by Premier Ferenc Gyurcsany in 2007.

Orban targeted Simor before the 2010 election, when the former anti-communist student leader won a two-thirds parliamentary majority that he called the “ballot-box revolution.”

In 2009, leaders of Orban’s ruling Fidesz party, then the biggest opposition group, called on Simor to quit after he confirmed that he had transferred part of his savings to a company he owned in Cyprus, where the tax rate is lower. Simor refused to resign and has since repatriated his savings after telling lawmakers he “understood” that state officials “need to abide by stricter rules.”

Orban’s Calls

Ten days before taking office, Orban pledged to quickly “settle” conflicts with Simor after his party criticized monetary policy as “incompetent” for holding rates too high for too long, allegedly deepening the country’s economic crisis. The central bank also should have stemmed the proliferation of foreign-currency loans that put tens of thousands at risk of losing their homes after the forint plunged, according to Orban.

“You need a basis of cooperation and there is no basis with the current central bank,” Orban told reporters in Budapest on May 19, 2010. “We won’t show brutal force against the central bank. But we have a two-thirds majority and this situation needs to be solved. We will solve this situation within a short time after forming the new government.”

Hungarian governments have a history of meddling with the central bank’s independence ever since the transition from communism to democracy in 1990.

‘Personal Attacks’

“This is reminiscent of what I went through,” Peter Akos Bod, who served as central bank president from 1991 to 1994 before quitting, said in a phone interview in reference to Simor’s ordeals. “I faced savage personal attacks. The difference then was that Hungary wasn’t part of the European Union and I enjoyed no protection.”

Bod got the job after Gyorgy Suranyi lost his after a year in 1991, when the country’s first freely elected government changed the central bank law to give the prime minister the power to replace him. Suranyi served a full term from 1995 to 2001, the second half of which coincided with Orban’s first stint as prime minister.

In 2005, Gyurcsany of the Socialist Party enlarged the Monetary Council and ended the central bank’s monopoly on the nomination of policy makers after criticizing Zsigmond Jarai, the bank’s president at the time who was appointed by Orban.

Simor’s term expires next March. His willingness to endure attacks and stay on the job may encourage those who follow to stay on to fight for central bank independence, Nowotny said.

“This is one of the points why I admire Andras Simor,” Nowotny said. “He’s still fighting even knowing that his term is coming to an end because he wants to set a standard. I hope in this way his battle makes sense and is not just a battle but also the war. He is leading by example.”

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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