UPDATE 2-Hungary central bank deputy governor resigns to protest changes at bank
* Vice governor Kiraly says changes could damage economy
* Resignation may raise fresh doubts on bank's independence
* Kiraly says Monetary Council cannot fulfil role
* Says bank communications policy 'could hurt credibility'
By Krisztina Than
BUDAPEST, April 8 (Reuters) - A deputy governor in Hungary's central bank resigned on Monday in protest at what she said was a campaign by appointees of Prime Minister Viktor Orban to reduce the bank to a rubber-stamp for risky economic policies.
Deputy governor Julia Kiraly launched a scathing attack on the new bank governor put in place by Orban, saying that by firing seasoned staff and changing the bank's procedures, he was risking long-term damage to the Hungarian economy, which is already the most indebted in central Europe.
Kiraly was the last remaining member of the eight-strong Monetary Council who was not appointed by Orban's government or his Fidesz party. Her six-year term would have expired in July.
The resignation of such a senior official could give new fuel to accusations from his opponents that Orban, who has clashed repeatedly with the European Union and international lenders over his idiosyncratic policies, is eroding the independence of institutions which could challenge him.
The central bank did not respond to a request for comment and there was no immediate comment from the government.
Markets were untroubled by the resignation: foreign investors say even if they don't like Orban's policies, they are sticking with Hungarian bonds and the forint currency because the yields are higher than almost anywhere else in Europe.
Kiraly resigned four days after she abstained from a vote on economic stimulus measures proposed by the bank's new management. She said she was given the document 35 minutes before it was put to a debate and vote, not enough time to give it proper consideration.
"Decisions have been made that could cause serious damage not only to the National Bank of Hungary but in the longer term also to the Hungarian economy," Kiraly wrote in the resignation letter which she submitted to the Hungarian president.
"Taking all of this into account, I can see an increasing likelihood that decisions could be made that are not well-founded, and (which are) mistaken, for which I do not wish to take any responsibility."
Orban, a 49-year-old conservative who made his name as a young dissident when Hungary was behind the Iron Curtain, has overseen four revisions of the constitution, imposed swingeing "crisis taxes" on some foreign firms and forced banks to write off some of the debt owned by Hungarian households.
His opponents accuse him of harming Hungarian democracy and gambling with economic stability. The EU says he has eroded the independence of the courts, the media, the central bank and other institutions, pulling Hungary out of Europe's mainstream.
He says he has saved Hungary from a Greek-style economic collapse, his reforms are democratic because he won a huge majority in a 2010 election, and he is under attack because he threatens the interests of foreign business lobbies.
STABLE MONETARY POLICY
Until recently, investors had looked to the central bank as a strong institution capable of off-setting government policies. However, its image for independence has declined since Gyorgy Matolcsy, an Orban ally, was sworn in as governor last month.
Kiraly's departure will not change the balance of power inside the central bank's Monetary Council, since appointees of Orban and his Fidesz party dominate the rate-setting panel.
"She (Kiraly) was the last of the Mohicans," said Erste Bank analyst Zoltan Arokszallasi. "The fact that she criticises what happens in the bank is no surprise."
It means there will be one fewer voice in the council who could speak out against interest rate cuts, which the government backs to pull Hungary out of recession in time for an election next year but which carries risks of driving down the currency.
"Her (Kiraly's) resignation highlights the worries regarding the independence of the central bank and the stability of monetary policy," said Annika Lindblad, analyst with Nordea.
The forint, which in the past week's has been a barometer of market anxiety over government policy, was unaffected by Kiraly's resignation.
It has been growing stronger over the past few days because of two factors: relief that last week's stimulus package was less drastic than many in the market had anticipated, and a new monetary easing push by Japan which will generate new cash and push up demand for Hungarian assets.
Kiraly was upset at sweeping changes implemented by Matolcsy at the central bank headquarters, built in the last days of the Austro-Hungarian empire near the banks of the Danube.
According to official bank announcements and accounts from insiders, he fired some of the most seasoned economists, and turned a hall previously used for staff to debate policy into an office for one of his lieutenants. The bank has said the dismissals were aimed at trimming costs.
In her resignation letter, Kiraly said she was stepping down from all her central bank posts "to signal the seriousness of the situation" since Matolcsy became governor last month.
She said Matolcsy was imposing a style of top-down control that, if unchecked, could lead to management by fear.
"Analyses written and rewritten under orders, and amid a sentiment of a lack of confidence and fear, could lead to bad, not properly thought-over decisions," she told journalists. "Fear kills the personality, creativity, free thought ... and professional honesty sooner or later."