Hungarian parliament passes central bank law

Updated: 2011-12-31 14:18


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BUDAPEST - Hungarian parliament on Friday adopted a new law to give the government a greater say in central bank appointments despite clearly-voiced objections by the European Union (EU) and the International Monetary Fund (IMF).

While both the IMF and the EU fear the new law will curtail the independence of the National Bank of Hungary, Prime Minister Viktor Orban refused to back down, arguing that it had met most requirements of the European Central Bank (ECB).

A requirement not met is that the government should refrain from increasing the number of members of the bank's Monetary Council, the body that sets interest rates and the number of deputy governors.

In addition, central bank governor Andras Simor was deprived of the right to name his own deputies. Under a separate law, the central bank and the Financial Services Supervisory Authority could be combined, and the chief of the combined authority would become the superior of the central bank governor.

Earlier unorthodox moves by Hungary's government, such as nationalizing private pension funds and levying extra taxes on banks, energy suppliers and others, have made investors sufficiently jittery to sink the local currency the forint to record lows against the euro.

The currency continued to tumble on Friday following passage of the law and is now down by 12 percent for the year. Half of the government bonds offered for sale on Thursday remained unsold.

The IMF said on Wednesday the government needed to reconsider these policy issues including the central bank law if it really wanted to begin loan negotiations.

In December, ratings agencies Moody's and Standard and Poor's downgraded Hungary's sovereign credit to junk status.

The European Commission said it would continue an in-depth study of Hungary's central bank law, Hungarian broadcaster InfoRadio reported.

The National Bank of Hungary warned that the new regulations could do "serious damage" to the country's national interests and threaten economic stability.

In a letter delivered on December 23 and just made public, US Secretary of State Hillary Clinton called on Orban to consider the consequences of adopting a legislation to which the United States and the European Commission objected.