December 16, 2011 / 3:10 PM / 8 years ago

UPDATE 3-EU/IMF halt Hungary talks after c.bank row

* EU Commissioner interrupted aid talks in Hungary

* New bill could undermine Hungary cbank’s independence

* Govt must back down or face market selloff - analysts

* Forint falls 0.7 pct vs euro on IMF news, bond yields jump

By Krisztina Than and Marton Dunai

BUDAPEST, Dec 16 (Reuters) - The EU and IMF on Friday cut short talks with Hungary aimed at paving the way for aid discussions, pressuring the government to amend a controversial central bank bill or face possible financing problems next year.

Hungary’s centre-right government, which broke ties with international lenders in 2010 and pursued unorthodox policies to boost the economy, said in a U-turn last month it would reopen discussions with the IMF and EU amid a deepening euro zone debt crisis, which put its markets under pressure.

Budapest’s chief IMF negotiator said after the informal talks were broken off that the government was ready to resume them and was building European Central Bank proposals into the new bank law, which critics said would in its current form undermine the Hungarian central bank’s independence.

The IMF said it had suspended the talks because the government had shown no willingness to delay the bank law, which the ECB also criticised.

For Prime Minister Viktor Orban, who won power in a 2010 landslide election, returning to the Fund was a severe political blow.

But the promise of a new IMF deal potentially worth up to 20 billion euros has helped shore up the forint currency and bonds, and limited damage from a sovereign downgrade to “junk” debt status by Moody’s last month.

Investors were hoping Hungary would secure a backstop for next year when its economy could slide into recession, and when the country has to roll over close to 5 billion euros in foreign currency debt, on top of significant forint debt expiries.

A spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels had halted the talks - arranged as a prelude to discussions on aid next month — due to the lack of assurances about the government’s intentions with the new law.

“(It) ...could potentially undermine the independence of the central bank,” spokesman Amadeu Altafaj told Reuters.

The forint fell 0.7 percent versus the euro on the news, while government bond yields jumped 20 basis points, recouping some of those price falls later in the day.

UNDER SCRUTINY

Earlier on Friday, Orban renewed pressure on the central bank to pursue growth-friendly policies as his government struggles to avoid further budget cuts.

But the bank is widely expected to raise interest rates next Tuesday, opting instead to defend the forint and stave off inflationary pressures.

Lawmakers of the ruling Fidesz party pushed through a motion on Friday to accelerate general debate of the new bill, which Governor Andras Simor has warned amounted to a government takeover at the bank.

An IMF spokeswoman said the fund had raised concerns about “possible limitations to Hungary’s central bank independence” in the new bank law.

“Given that the government did not indicate a willingness to delay passage of the law to allow for further discussions, it was decided to interrupt the (talks),” she said, adding that negotiators remained in touch “to determine the next steps.”

Ruling Fidesz party MP Janos Lazar told a news conference that the party’s parliamentary group was ready to weigh the ECB’s opinion on the central bank law before it was passed.

Asked about the premature departure of the IMF/EU team, Lazar said with reference to the country’s 20 billion euro IMF/EU bailout in 2008: “Hungary owes the IMF significant amounts of money, I have no doubt that they will return to collect what we owe them.”

Hungary will have to start repaying this loan to the Fund next year.

FUNDING BACKSTOP NEEDED

News website index.hu said the main stumbling blocks in the discussions were the bank bill and the government’s decision to strip private pension fund members of monthly payments for at least another year.

Hungary is hoping to negotiate an up to 15-20 billion euro, three to four-year precautionary package of aid, Orban’s state secretary said earlier this week, also calling for closer coordination between fiscal and monetary policy.

But analysts said if the government does not back down on the central bank legislation and comply with the lenders’ demands, negotiations about the new deal could be derailed which would lead to a renewed selloff in the forint and bonds.

“A breakdown of the talks would lead to a significant weakening of the forint and a surge in yields,” said Zoltan Arokszallasi at Erste Bank.

“Hungary’s debt expiries will pick up from the second quarter of next year and it would be easier to finance state debt if there is a deal with the IMF in January or February.”

“Our view remains that increasing funding difficulties in H1 will force Hungary to sign up and submit to policy conditionality and from there some ‘normalisation’ can occur, but the road to that point looks very rocky,” said Peter Attard Montalto at Nomura in London.

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