Suspicion rules ahead of latest Hungary-EU talks

Mon Apr 23, 2012 3:59am EDT

* IMF aid talks frozen over central bank dispute

* Budapest has made concessions; EU says not enough

* Orban due to meet Commission's Barroso on Tuesday

By Robin Emmott

BRUSSELS, April 23 (Reuters) - Hungary appears no closer to convincing European officials it can restart talks over financial aid ahead of Prime Minister Viktor Orban's visit to Brussels this week and behind the scenes that may suit the maverick leader.

The European Commission, already at odds with Orban over his aggressive, centralising style, halted talks on an International Monetary Fund loan last December, citing legislation it said undermined the independence of Hungary's central bank.

That is just one of the issues still outstanding in a row over policy that forced Orban to refute charges he was dragging Hungary towards authoritarianism when he met Commission President Jose Manuel Barroso in January.

Orban and his ministers have been saying for months they are doing all they can to get aid talks going, but the gestures they have made on actual legislation have come up short and analysts believe the prime minister may simply be playing for time.

That would rely on Budapest's financial reserves allowing it to hold out until some of the pressure on global markets from the euro zone's debt crisis eases, making investors more willing to invest in riskier assets like Hungarian bonds.

But with much of Hungary's public and private debt in foreign currencies, the risk is that those investors who are still funding it will lose faith and drive a sell-off of the forint, which could drive it into a funding crisis.

Brussels, for its part, is offering no sign it is willing to give much ground.

"Hungary will likely need to take further steps before this can be resolved," said an EU official with direct knowledge of the negotiations, referring to the central bank law.

Orban, who meets European political allies in Brussels on Monday before talks with Barroso on Tuesday, has said that setting preconditions for aid talks would be "blackmail".

A meeting of Hungary's government, the Commission, the IMF, the ECB and the Hungarian central bank last week in Frankfurt made little progress and an EU diplomat said it was difficult to predict the outcome of Barroso's talks with Orban.

"There's no trust at the political level, with both sides accusing each other of being unreasonable," the diplomat said.

Hungary's foreign minister was more hopeful.

Janos Martonyi told local news channel HirTV on Sunday that he expected the EU to give the green light to credit talks by the end of April after Orban meets with Barroso this week.

"We expect ... as this is what we are hearing from the Commission, that the decision about this, that the start of the talks with the European Commission and the International Monetary Fund, will be made by the end of April," he said.

INTENT

With the IMF programme contingent on the EU's backing, the government submitted changes to the central bank law to parliament last week but did not address all the concerns of the Commission and the European Central Bank (ECB).

At the heart of the dispute are moves to reduce the salary of the bank's governor and senior officials, breaking EU law that prohibits pay cuts during a governor's tenure.

The Budapest government says the cuts are part of a broader reform that applies to the entire civil service.

Analysts say that all seems like a phoney war, which either hides Orban's intent to avoid submitting to the conditions that would come with another IMF programme or simply to win one without conceding too much more ground.

Orban, who helped lead Hungary's fight against Communism and was premier between 1998 and 2002, won a landslide victory in 2010 with his Fidesz party. The party used its strong mandate to rewrite more than 300 laws and the country's constitution, in changes critics say weaken democratic checks and balances.

Credit rating agencies have cut Hungary's sovereign bonds to "junk" status in response to some of those moves and the forint has only been propped up by hopes of an IMF deal, with investment banks including Credit Suisse still expecting Hungary to agree a precautionary loan this year.

That faith has been undermined by the dragging out of the row with Brussels, however, and Orban's leeway for bargaining ahead of the loan talks would narrow if investors turned against Budapest as a result.

"It depends on how patient markets are," said Gergely Hudecz, an economist at Credit Suisse in Paris. "As long as markets give the benefit of the doubt that an IMF deal will happen, the government will take its time to negotiate."

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