The EU And IMF Watch In Horror As Everything Goes To Hell In Hungary
Hungary just approved a new central bank law, to the dismay of the International Monetary Fund and European Union.
It's the same law that caused the two international organizations to withdraw their support for Hungary's bailout earlier this month.
The law changes the way Hungary's central bank is managed, in a way the EU and IMF have argued will to compromise its independence from politics.
Hungary has been at the center of quiet economic
angst in Eastern Europe, largely overshadowed by the sovereign debt crisis in
southern Europe. Standard
& Poor's downgraded Hungarian government debt to junk last week and the
government staged the latest
in a series of failed bond auctions yesterday.
However, Austrian
banks' ties to the struggling country are the primary cause for concern in
European economy. They have an estimated $226 billion in exposure to Eastern
Europe, with €1.14 trillion ($1.6 trillion) of assets held in the region. Though
the silent beneficiary of liquidity measures by the European
Central Bank, yields on Austrian 10-year government bonds have risen to more
than 2.93% this morning.
Image: Bloomberg
Yields on Hungarian 10-year government bonds have spiked this
year.
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S&P
synopsized Hungary's problems neatly in a note out earlier this month:
In our opinion, changes to the constitution
and the functioning of some independent institutions, including the central bank
and the constitutional court, have undermined Hungary's institutional
effectiveness.
Following changes to the process of appointing
members of the central bank's monetary policy committee in 2010, the authorities
most recently have proposed legislation that we believe could further compromise
the central bank's independence.
The EU and IMF had asked Hungary to consider other proposals for
maintaining the bank's independence. In particular, the European Union disagreed
with two major points of the new law—an increase in the number of
representatives in the monetary council and the number of deputy governors and a
stability law that would force banks to stomach losses on foreign loans.Again, from S&P:
Moreover, we believe that measures taken over the past year, which
affect several services sectors, could hinder
economic growth by reducing banks' willingness to lend and companies'
appetite to invest. In particular, the imposition of temporary tax hikes on
various services--including telecoms,
energy, and the financial and retail sectors--is likely to depress investment and job creation in the short term, in our view. This could constrain growth prospects at a time when we see risks to the open Hungarian economy are rising due to the uncertain outlook for the global economy."
energy, and the financial and retail sectors--is likely to depress investment and job creation in the short term, in our view. This could constrain growth prospects at a time when we see risks to the open Hungarian economy are rising due to the uncertain outlook for the global economy."
While Bloomberg reports
that the EU government will examine the new law "in depth" and has sworn it will
be "constructive" in its dealings with the country, continued government
unwillingness to bend to the whims of international organizations bodes ill for
the sustainability of government debt.
