ECB criticizes Hungarian bank law

AP News
Posted: Dec 22, 2011 12:43 PM
ECB criticizes Hungarian bank law

The European Central Bank warned Thursday that a draft law before Hungary's parliament would undermine the independence of the country's central bank.

The ECB said that increasing the number of deputy directors and members of the bank's monetary council could be used to influence the bank's decision and that the draft law would also undermine the bank's governor.

The 23-member ECB governing council said Hungary needed to respect EU law on consulting the ECB and added that the country's three major revisions of central bank law in 18 months "are incompatible with the principle of legal certainty."

The ECB's warning comes a day after Standard & Poor's downgraded Hungary's credit rating to "junk" status because of worries about proposed policy changes regarding the country's central bank.

S&P lowered its rating on Hungary's debt to the non-investment grade of BB+ and warned there may be more to come. Its negative outlook on Hungary means there is at least a 1-in-3 possibility of another downgrade over the next year if Hungary's fiscal performance deteriorates.

The lower rating could mean that Hungary has more difficulty borrowing, and may have to pay higher rates on its debt. Moody's, a rival credit-ratings agency, had downgraded Hungary's rating to junk status in late November.

S&P said that policy changes related to Hungary's central bank appear to curtail the bank's independence and that such changes complicate the operating environment for investors. They're likely to have a negative impact on investment and fiscal planning, which will weigh on Hungary's medium-term growth prospects, S&P concluded.

"The downgrade reflects our opinion that the predictability and credibility of Hungary's policy framework continues to weaken," S&P said.

Prime Minister Viktor Orban's government has taken steps 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. The government is also laying the legal groundwork for the possible merger of the central bank and Hungary's financial regulator.

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Concerns over Hungary's central bank lay behind last week's decision by the European Union and the International Monetary Fund to break off preliminary talks with the country on a financial aid package. S&P said the authorities have indicated that negotiations are likely to resume then.

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. Formal talks between Hungary and the IMF and EU were supposed to begin in January.