UPDATE 2-Hungary fails to convince EU; no date for aid

Wed Mar 7, 2012 1:51pm EST

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By Robin Emmott and Krisztina Than

BRUSSELS/BUDAPEST, March 7 (Reuters) - Hungary offered concessions to the European Central Bank on Wednesday, addressing some but not all of the objections from European institutions that have blocked the country's bid for international aid to keep it solvent.

The government sent the ECB a draft amendment to a law that European institutions say would undermine the independence of Hungary's central bank.

The EU launched legal action against Hungary in January over this and other legislation that Brussels says conflicts with EU law and also hurts the independence of the judiciary and the data protection authority.

Prime Minister Viktor Orban has backed down in his standoff with Brussels and the EU's top economic official Olli Rehn said in a statement earlier he saw a willingness by Hungary to meet the demands of the European Union's executive Commission.

But while the Commission will take no further legal action on the central bank impasse, it was still cautious and said it would move forward with legal proceedings on data protection and the retirement age of judges.

"I welcome that Hungary is ready to correct its central bank legislation. However, we need clear commitments," said Rehn, the EU's Economic and Monetary Affairs Commissioner.

The draft law sent to the ECB would withdraw rules about the dismissal of Monetary Council members and the right of the government to receive the agenda of the panel's meetings and send a representative to the meetings, the Economy Ministry said.

But the Commission has also objected to the text of the oath which the central bank's leaders take, and cuts in their salaries. The ECB has criticised an expansion of the bank's Monetary Council and the appointment of a third deputy governor.

Orban needs an International Monetary Fund deal to rebuild investor confidence in his unorthodox economic policies, after two years of measures that included Europe's biggest bank tax and a renationalisation of private pension fund assets.

Budapest is also being pressed by the Commission to cut its deficit - or face losing access to 495 million euros in EU funds.

The Commission declined to comment on recent statements by senior Hungarian officials that talks could soon start on a precautionary standby loan from the Washington-based lender.

Hungary's forint, which plunged to a record low versus the euro in the first week of January, has firmed sharply in the past few weeks on hopes for a quick agreement with the IMF.

But the currency weakened against the euro on Wednesday on concerns that the timetable for talks had slipped further back, before coming off a session low on news of the letter to the ECB.

Initially markets expected a deal by April; now analysts project an agreement could be sealed by the end of June.

The Commission has said both it and the European Central Bank needed to see the draft legislation that Hungary is proposing, as well as confirming its plans to stop issuing official press releases criticising monetary policy decisions of the Hungarian central bank.

The Commission said it wanted more assurances that the central bank governor's wages would no longer be used "as a tool to exercise pressure and a breach of independence of the central bank".

WIGGLE ROOM?

In a sign of the pressure on Budapest, the Commission escalated its legal proceedings on the issues of retirement ages for judges - which it said would force more than 270 judges and prosecutors to retire - and the independence of the country's data protection supervisor.

"We still have serious questions regarding potential violations of EU laws," said the EU's Justice Commissioner Viviane Reding, referring to the two issues.

A failure to meet the concerns of Brussels could end up in the European Court of Justice, which could in turn order Budapest to act and impose fines and withhold more EU funds.

With the forint firmer and yields on government bonds back at about 8 percent, down from peaks of 11 percent in early January, the Hungarian government is no longer under immediate pressure to sign a quick deal with lenders.

In February, Hungary said it could push the dispute on judges' retirement ages all the way to court.

"My nagging suspicion all along has been that the Orban administration would only do an IMF deal if forced by the market to do so," said Timothy Ash at RBS.

"Arguably the forint at current levels is not at a level that the government thinks that it has to cut a deal with the European Commission/IMF at all or any cost - it still thinks that it has wiggle room to negotiate a little more with the Commission, prior to getting agreement to begin talks on a formal IMF programme."

Given Hungary's high debt and foreign currency debt exposure, such a strategy may not be viable if investor sentiment sours.

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