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15th Aug 2022

EU slams Hungary for power-grab on central bank

  • Viktor Orban (l) is coming under increased EU pressure to change a controversial banking law (Photo: ec.europa.eu)

The European Central Bank (ECB) on Thursday (22 December) lashed out at the Hungarian government over plans to seize control of its central bank, the latest in a series of power-grabs by the ruling party amid worsening economic conditions and downgrades to 'junk' territory by two major ratings agencies.

Enforcing the current draft law on the central bank (Magyar Nemzeti Bank) "could undermine [its] independence", the ECB said in a statement, focusing on a provision which would increase the number of deputy governors, effectively giving the government a say in the setting of interest rates.

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Merging the central bank with the country's financial supervisory authority and creating a new institution, as envisaged in a second draft bill would also "affect the personal independence of the central bank's governor," the ECB warned.

The draft laws have already drawn criticism from the EU commission and the International Monetary Fund (IMF), whose negotiating team last week broke off talks on a "precautionary loan" in protest over the envisaged legislative changes.

The centre-right Fidesz party of Prime Minister Viktor Orban enjoys a super-majority in the parliament able to pass constitutional changes or any other legislative moves it wants.

Orban is at odds with the governor of the central bank, as the financial institution has boosted interest rates to record highs, reaching seven percent on Tuesday - the highest in the EU. This puts the squeeze both on the government and the private sector, where most of the mortgages have been taken out in euros and Swiss francs, while the forint is depreciating rapidly.

In addition, the Hungarian central bank on Thursday warned that the government is likely to miss its deficit target for 2012, estimating that the shortfall will be more like 3.7 percent of gross domestic product compared to the goal of 2.5 percent.

Last week, EU commission chief Jose Manuel Barroso sent a letter to Orban warning that the two bills are in breach of EU law and "strongly advised" him to withdraw them from parliament.

Since the IMF walk-out, the Hungarian government's repayment capacity was downgraded to "junk" by Standard and Poor's, after Moody's - another major ratings agency - did the the same in November. Both have projected a negative outlook for the country's economy, forecast to have the highest debt level and slowest economic growth among the EU's eastern members next year.

Informal discussions on an IMF loan will resume in January, an EU commission spokesman said Thursday.

In a separate row, EU justice and fundamental rights commissioner Viviane Reding has also sent a letter to Orban's cabinet regarding data protection issues and age discrimination, after the government changed the retirement age for judges.

Earlier this year, just as Hungary was taking over the rotating EU presidency, the Orban government made headlines with a so-called media-gagging law, fiercely criticised by the EU Parliament and commission.

Under Brussels pressure, the Hungarian government revised some of the most controversial provisions, but human rights watchdogs such as the Council of Europe say the changes were "cosmetic".

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