Markets punish Hungary for power grab on central bank

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.