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3rd Jul 2022

Markets punish Hungary for power grab on central bank

  • The forint lost 23% against the euro in six months (Photo: Johnnie Walker)

The forint hit a record low against the euro on Wednesday (4 January) and Budapest's borrowing costs spiked as the Hungarian government remained defiant on EU and street protesters' calls to roll back controversial constitutional changes.

The forint fell to 319.4 against the euro, a record low after a gradual depreciation of 20 percent in the last six months, while 10-year bond yields spiked to 10.5 percent, the highest since April 2009.

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Hungary, the EU's most indebted eastern member, already saw its credit rating downgraded to junk in December and initiated talks for a standby loan from the International Monetary Fund (IMF).

But the centre-right government led by Viktor Orban has pursued controversial legal changes to some of the country's independent institutions, including the central bank and media bodies, prompting IMF negotiators to walk out of talks.

The laws came into force on 1 January, prompting tens of thousands of people to take to the streets on Monday and repeated warnings from the EU commission that it may take Hungary to court.

"The College [of EU commissioners] will decide in the coming days or weeks when or if there is an infringement, and of course the commission will act in order to make sure that the Hungarian law is in line with EU treaties," commission spokesman Olivier Bailly said on Wednesday.

He added that the EU is not engaged in any bail-out talks with Budapest.

Meanwhile, Hungarian officials indicated they are willing to consider meeting the necessary demands for an EU-IMF loan, ahead of "informal" talks scheduled next week in Washington.

"We'll see what is the best solution for both parties. There are a lot of uncertainties globally," Gyula Pleschinger, a state secretary in the ministry of economy, told the Wall Street Journal. She said a "precautionary" loan as envisaged by Budapest "would be a safety net. It could calm down markets and help our financial strength."

Roland Natran, another ministry official, told the same newspaper that the country has formulated a "plan to finance ourselves" in the event no deal is reached.

For his part, Guy Verhofstadt, the leader of the Libeal group in the EU parliament, urged the Commission to take action to ensure freedom and democracy are upheld in Hungary.

"It is no longer a matter of 'exchange of letters' between the commission and the Orban government ... The time has come to initiate legal and political sanctions by the EU institutions," he said.

Infringement proceedings, which can include action before the European Court of Justice as well as fines, would take several months if initiated.

The EU commission on Wednesday also indicated that it is watching Hungary on its new media laws.

The country's constitutional court has told its parliament it must by 31 May roll back some recent measures so that journalists can adequately protect their sources and are not forced to seek permission from contacts before they publish their quotes.

Hungarian leader accused of 'dictatorship' over new constitution

Tens of thousands of Hungarians have held a protest against a right-wing overhaul of the country's constitution, with former dissidents accusing PM Orban of "dictatorship" and an ex-US ambassador saying the country could be kicked out of the EU.

Agenda

This WEEK in the European Union

An EU parliament reshuffle, the fiscal compact treaty, Hungary's constitutional reforms and an oil ban on Iran are likely to dominate the Union's agenda next week.

Brussels warns Hungary on constitutional reform

The EU commission has warned Hungary to change parts of its constitution or face legal action amid fears that Prime Minister Orban is undermining the independence of key parts of the state.

Green crime-fighting boss urgently required, key MEP says

The European Parliament approved last week a non-binding resolution on illegal logging, calling to extend the EU public prosecutor's mandate to also cover environmental crime. The lead MEP on the file has called for urgent implementation.

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