The European Union and the International Monetary Fund broke off preliminary talks Friday with Hungary on a financial aid package because of concerns that the government aimed to curtail the independence of the country's central bank.
Hungary said last month it would seek to work out a deal for unspecified aid from the IMF and the EU, a "security net" to reassure investors about its creditworthiness and financial stability.
Both institutions, as well as international observers, have been critical of steps taken by Prime Minister Viktor Orban's government to gain greater influence over the National Bank of Hungary, led by Andras Simor.
A new law regulating the central bank is being debated in Parliament, and on Wednesday, it was revealed that the government is also laying the legal groundwork for the possible merger of the central bank and Hungary's financial regulator.
"The European Commission is concerned about the intention of the Hungarian authorities to push forward with the adoption of laws that can potentially undermine the independence of the central bank," said a statement from Amadeu Altafaj Tardio, spokesman for EU Monetary Affairs Commissioner Olli Rehn.
"Given that the government did not inform the EU/IMF mission of any change in their intention to push for the adoption of the contested central bank law, the Commission, in close coordination with the IMF, has decided to interrupt the preparatory mission," the statement said.
Formal talks between Hungary and the IMF and EU were supposed to begin in January. It was not clear yet how Friday's move would affect those talks.
Relations between the government and Simor have been rocky since Orban was swept into power in a landslide victory in April 2010. Simor was criticized for having owned a company registered in Cyprus _ which he sold before taking on the role of central bank president _ to avoid Hungarian taxes.
Fidesz, Orban's party, has a two-thirds majority in Parliament and can pass legislation practically at will. In March, the government already gained greater control over the central bank's Monetary Council, which sets interest rates. The newly proposed changes are seen as granting the government an even tighter rein over Hungary's monetary policy while setting the stage for Simor's dismissal.
In late 2008, Hungary's previous Socialist government was given a standby loan of euro20 billion ($26 billion) to avoid bankruptcy by the IMF, the EU and the World Bank.
Last year, Orban decided not to renew the IMF deal but in a spectacular policy U-turn, said in November that it would seek new IMF-EU support.
Hungary has been an EU member since 2004, but does not use the euro.