UPDATE 2-Hungary moves closer to restarting IMF aid talks

Tue Apr 24, 2012 11:58am EDT

* Orban says Hungary "very close" to ending dispute with EU

* Barroso, diplomats cautious on breakthrough for IMF talks

* Commission says won't refer dispute to court; markets jump

By Robin Emmott and Francesco Guarascio

BRUSSELS, April 24 (Reuters) - The European Union will not take Hungary to court to resolve a row over a central bank law that has frozen aid talks with the International Monetary Fund, fuelling optimism that Budapest may be nearer a deal to stabilise the country's economy.

Signs of progress came as Prime Minister Viktor Orban said on a visit to Brussels on Tuesday that obstacles to Hungary's financial aid have been "practically removed", even if the European Commission's top official insisted after a meeting between the two men that more discussion was needed.

Hungary's forint firmed over one percent after Orban's comments and on a document seen by Reuters in which the Commission said it would not refer the legal dispute to the European Court of Justice.

The EU's executive, at odds with Orban over his overhaul of the Hungarian constitution and hundreds of laws, halted talks on an IMF loan last December, citing legislation the Commission believes undermines the independence of Hungary's central bank.

"We got very close to being able to achieve a breakthrough (on outstanding issues). This is a question of days, maximum weeks," Orban told reporters after meeting European Commission President Jose Manuel Barroso in Brussels.

"This also means that the obstacles to starting negotiations with the IMF have been practically removed," he said.

However, diplomats cautioned that Budapest had yet to completely win over the Commission in the dispute.

Barroso is due to brief EU commissioners on Wednesday, where they could decide to endorse Budapest's policies or push for more changes to the central bank law.

But the EU's top economic official Olli Rehn has decided not to refer the dispute to the European Court of Justice because Budapest is cooperating, according to the document seen by Reuters.

"Provided Hungary follows through on the measures it has communicated, the Commission is prepared to close this case once the legislation is adopted," said the document, which is due to be made public on Wednesday.

Barroso's office sounded a cautiously positive note after his meeting with Orban, but gave few details.

"President Barroso welcomed the commitments made by Prime Minister Orban on the prompt and full implementation of the measures regarding the independence of the central bank," Barroso's spokeswoman said in a statement.

DON'T CUT MY SALARY

Changes to the bank law could pave the way for IMF talks to resume, as Rehn said in January the issue of the bank's independence needed to be solved before negotiations on a stand-by loan could restart.

Hungary's central bank kept rates at 7 percent for the fourth consecutive month on Tuesday, in an effort to prop up Hungary's forint and debt markets.

Budapest hopes an IMF loan, which it hopes it will not need to draw on, will bring down borrowing costs that have reached near unaffordable levels as investors question the wisdom of Orban's unorthodox economic policies.

At the heart of the dispute are Hungarian moves to cut the pay of the bank's governor and senior officials, breaking EU law that prohibits such reductions during a governor's tenure.

Orban, who has accused the IMF and the Commission of delaying loan talks with "preconditions", argues the cuts are part of a public sector-wide salary reform and not directed at the central bank.

Orban's office said in a statement the government would push through proposed changes to the bank law swiftly and consult further with the European Central Bank, but the salary question would remain.

"Orban said in the meeting he could not lift the salary cap, so it is up to President Barroso to decide whether he agrees with the prime minister," said one EU diplomat briefed on the meeting between the two men.

Peter Attard Montalto, an analyst at Nomura, said Orban may be too optimistic on winning over the IMF and the Commission.

"The very fact Orban says he will not compromise on the National Bank oath or wage issues also points to fact that talks are not about to start, in my mind," Montalto said, referring to an oath of office for Hungary's central bankers.

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