January 24, 2012 / 9:51 AM / 8 years ago

UPDATE 3-Hungary EU deal hopes dim, PM in Brussels

* Deputy PM: unsure if ambition of Brussels meeting is to
reach deal
    * Says issues at stake "just not that pressing"
    * C.bank unexpectedly keeps rates on hold, forint eases 0.5
    * EU finance ministers open way to cut off cohesion funds
over budget slippage
    * EBRD slashes 2012 growth fcast for Hungary to -1.5 pct

    By Gergely Szakacs and Krisztina Than	
    BUDAPEST, Jan 24 (Reuters) - Hungarian Prime Minister
Viktor Orban tried to move closer to a deal with the European
Commission on Tuesday to rework laws critics say undermine
democracy so he can revive stalled international aid talks.	
    But Orban's deputy tempered expectations of an agreement and
 revealed a potential point of conflict between Budapest and the
Commission, which has threatened legal action if Hungary does
not change laws on the central bank, courts and data protection
that critics say undermine democracy.	
    European Union finance ministers also opened the way on
Tuesday for the bloc to freeze cohesion funds to Budapest,
saying unorthodox decisions that Orban has used to cut the
budget deficit had not brought it below the bloc's ceiling in a
sustainable way.	
    Orban's efforts to centralise power and stack
Hungarian state bodies with party loyalists have drawn criticism
from Brussels and Washington, which fear they stifle democratic
freedoms in the ex-communist country of 10 million. 	
    He has lost much of his support at home, while the economy
is heading for recession and investors' loss of confidence has
pushed borrowing costs to above 9 percent. Analysts say Orban
needs an aid deal to maintain access to the markets.	
    He will meet Commission President Jose Manuel Barroso on
Tuesday to present a timetable for legal changes.	
    However, Deputy Prime Minister Tibor Navracsics said the aim
of the meeting was not necessarily to clinch a deal that would
give a green light for aid talks with the EU and IMF to resume.	
    "I do not know if either the prime minister or the president
of the Commission have the ambition to strike an agreement
today. The issues at stake are just not that pressing," he told
public radio.	
    A $13 billion private pension grab produced a rare fiscal
surplus last year, buying Hungary some time before it must
borrow 5 billion euros to fund repayments to bondholders and to
the EU and IMF for an earlier loan.
    But the economic outlook is grim. The European
Bank for Reconstruction and Development cut its forecast for
Hungary's economy on Tuesday to a 1.5 percent contraction in
2012, its weakest outlook in emerging Europe.	
    Confounding market expectations, the central bank left
interest rates on hold at 7 percent at a meeting on Tuesday.	
    Analysts in a Reuters poll had predicted a half point hike
after the bank made two such increases since November to staunch
investor flight from Hungarian assets. The unexpected hold move
knocked the forint half a percent lower versus the euro.	
    Orban in the past pledged to resist outside pressure from
parties like the IMF and EU and take Hungary on its own course.	
    But then rating agencies cut Budapest's debt to "junk" and
the Commission began infringement procedures. After investors
fled the forint, driving it to a record low against the euro and
pushing bond yields above a ruinous 11 percent, Orban promised
to reverse some policies. 	
    It was a major political climbdown for the prime minister
who swept to power in 2010 with the strongest political mandate
in Hungary's post-communist history although analysts and EU
leaders are waiting him to fulfill the pledge.	
    "We trust that what Prime Minister Orban promised us, namely
to comply with EU legislation, will be true," Commission
spokesman Cezary Lewanowicz said in Brussels ahead of Orban's
meeting with Barroso.	
    Orban's overtures to the EU and IMF have generally boosted
market sentiment, lifting the forint a cumulative 5.5 percent
higher since it hit an all time low of 324.2 per euro on Jan. 5.	
    "Given the government has until February 17 to respond to
the European Court of Justice's infringement procedures, Orban
will continue to stall, even using his meeting today to get a
sense of where Barroso's limits lie," think tank Eurasia Group
said in a research note. 	
    A top government official said on Monday that
Hungary could have a new funding deal in place worth around
17-20 billion euros by March or April. Points of conflict
remain, however. 	
    Navracsics said the government disagreed with a Commission
demand that Hungary reverse a law lowering the retirement age of
judges from 70 to 62, a move Brussels says infringes on
judiciary independence. 	
    Another issue is Hungary's budget. EU finance ministers
endorsed a view from the Commission that Hungary had not done
enough to bring the gap below the EU's 3 percent of gross
domestic product ceiling in a sustainable way.	
    While the Hungarian deficit is set to hit that target, the
Commission believes it is only due to one-off measures and the
shortfall will grow again in 2013.	
    "From the moment the ministers approve the Commission's
assessment that Hungary has not taken effective action, the
Commission is free to decide to suspend up to 100 percent of
cohesion funds for Hungary from 2013," an EU official said.  	
   "Hungary will have until the end of the year to act to change
the Commission's mind."
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