The European Commission opened the way to financial aid talks for Hungary on Wednesday, ending a five-month dispute over the independence of its central bank that has undermined investor confidence.The Commission said it was satisfied with the assurances it had received from Budapest that its central bank law would be brought back in line with that European Union.
The College of Commissioners that opened various infringement procedures against Hungary in January, including on the independence of the central bank (NBH), has decided to drop the procedure on the national bank, Commission spokesman Olivier Bailly has told a press conference on Wednesday.
The Commission has assessed on Wednesday that Hungary has taken "sufficient action and commitments to enter into negotiations on precautionary balance of payment assistance," the EC said in a statement.
This decision has been taken in light of commitments by Hungary, confirmed by Prime Minister Viktor Orbán yesterday after his meeting with EC President José Manual Barroso, "to take tangible steps to ensure compliance with EU law on all the issues that are relevant for the stable and independent legal environment that lies at the heart of the investors' confidence and influences macroeconomic stability."
Based on Hungary's reply to the European Commission's administrative letter on this matter, the Commission has agreed today to close the infringement case on the independence of the Central Bank once the relevant legislation is adopted.
The Hungarian authorities have also committed to continue consultations with the European Central Bank (ECB) in view of finding an agreement on the remaining open issues.
Regarding the independence of the judiciary, another concern where no infringement proceeding was opened, Reading sent an administrative letter to her counterpart requesting further information parallel with a report by the Venice Commission.
At this point Brussels will not be adopting any supplementary measures, but will "continue to monitor this situation very closely," Bailly added.
He also noted that the Commission reserves the right to launch infringement proceedings on outstanding issues any time if it sees fit.
"Hungary has also committed to address promptly and fully the recommendations of the Venice Commission on key priority areas in the field of the judiciary reform," the EC added.
Before the negotiations can be concluded, the Commission expects that "the commitments are fully implemented."
As for the second infringement proceeding concerning the independence of the data protection authority Bailly said "some improvement has been noted in this area" but still the law "must be brought in line with EU regulations" and so the procedure will be taken to the next stage, i.e. the European Court of Justice will be called upon to examine the issue.
In the third infringement proceeding, which was launched against the country for it lowered the retirement age for judges to 62 years from 70 (as a result of which 10% of judges and 25% of notaries will be retired this year), Vice President Reading said the case should be referred to the ECJ and requested an "urgent procedure",
The Commission is also asking Hungary to "suspend the implementation of this law" until the ECJ ruling is reached.
There were two main reasons why the Commission decided to give the green-light to start aid talks with Budapest, Bailly said. The first was that it received "guarantees" from Hungarian authorities to change the central bank law so that it "ensures the full independence" of the NBH. "These guarantees are very clear," the spokesman said.
The second key factor is that Budapest has started to work on the five issues that were raised by the Venice Commission, which "creates more confidence in the legal environment."
The Commission said there was no date for restarting talks, and some analysts sounded a cautious note.
"The risk is still there that after stepping into the next stage, the market pressure will ease and the Hungarian government's commitment to reaching a deal could loosen and the whole process could slow down," an analyst said at Citigroup in Budapest. Orbán's government has enough currency reserves to service its foreign debt until about the end of the year, analysts say.
"The latest development certainly represents progress, and our concerns regarding Hungary's external and domestic environment are not as intense as when we took the decision to downgrade Hungary's rating and outlook in January," said Matteo Napolitano, Fitch's Director of Sovereign and International Public Finance in an emailed reply to Reuters questions.
"However, these concerns have not gone away, as underlined by the renewed turn for the worse in financial conditions facing eurozone peripheral countries."
Fitch reiterated that renewed fiscal slippage, a return to unorthodox policy measures and a worsening of Hungary's economic and financial environment could lead to a downgrade.
"In order to take positive action, we need to see the government achieve tangible progress in meeting its fiscal and structural reform targets, as well as begin in earnest to build a track record of policy predictability," it added.
Fitch Ratings cut Hungary's credit rating to "junk" on 6 January, following similar moves by Moody's and Standard and Poor's late last year.
"The Fund welcomes recent progress in Hungary's discussions with the European Commission. The Fund is ready to start negotiations as soon as adequate steps are taken to ensure central bank independence as has been discussed with the Hungarian government," Iryna Ivaschenko the International Monetary Fund’s (IMF) Resident Representative in Budapest told Portfolio.hu in an email.
"Interesting intervention by the IMF... It seems to be a case of good cop (EC) bad cop (IMF) now, which is disappointing from a market perspective, so might see some profit taking on the back of this," commented Timothy Ash, economist at the Royal Bank of Scotland in London in an email to Portfolio.hu.
The EC had indicated on Wednesday that they would be okay with negotiations over a new financing facility beginning even before the government had legislated promises made to change the central bank law to assure in terms of central bank independence.
They had indicated only that the amendments would need to be made prior to agreement over a financing arrangement itself.
"So the Fund seems to be hanging out for more from the government. The ball is now back in the government's court to push these legislative amendments through quickly," Ash said.
In his view, "through this intervention the fund is sending a clear signal that even when negotiations over a new financing facility begin, they wont be a walk in the park for the Hungarian side, the IMF will play hard ball."
This "makes one wonder how much coordination there has been here between the EC and the IMF. Perhaps the EC's willingness to soft peddle earlier this week reflects their assumption that the IMF would keep the pressure up on the Hungarians anyway," Ash concluded.
Source: Reuters, Portfolio.hu
Last Updated on Friday, 27 April 2012 07:03