Thread: Hungary faces ruin as EU loses patience

Hungary faces ruin as EU loses patience

The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible.

A general view of the Hungarian parliament. Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Photo: EPA

By Ambrose Evans-Pritchard, International business editor
7:41PM GMT 17 Jan 2012

Hungary's defiant premier Viktor Orbán has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him a stark choice of either bowing to EU demands or letting his country slide into bankruptcy.

Yields on Hungary's two-year debt jumped to 9.17pc on Tuesday, an unsustainable level for an economy in recession with public debt of near 80pc of GDP. Hungary's debt was cut to junk status by rating agencies last week.

Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Two-thirds of household debt is in Swiss francs, leading to a lethal currency mismatch as capital flight weakens the forint.

"Hungary is playing with fire," said Lars Christensen from Danske Bank. "The EU is not bluffing. It will let Hungary go over the edge to make the point that EU countries must play by the rules. Our worry is that Hungary's government has not yet got the message."

The EU said it had sent three letters of "Formal Notice" over Hungary's assault on the independence of the judiciary, the central bank, and the data protection ombudsman – the first step in "infringement proceedings". The dispute could ultimately lead to loss of Hungary's voting rights under Article 7 of EU treaty law.

"We'll use all our powers to make sure that Hungary complies with the rules of the EU," said European Commission president Jose Manuel Barroso.

Mr Orbán said his country was the victim of "international leftists" in Brussels. A zealous anti-Communist, he insists that Hungary's Stalinist past must be ripped out at the roots.

The immediate dispute centres on three laws in Hungary's new constitution pushed through despite EU warnings. Commission officials say these are just the "tip of the iceberg". Over 300 laws have been passed since Fidesz took power in 2010, giving the party sweeping control over the country's institutional system. Amnesty International said last week that Hungary's media clamp-down breaches human rights.

The Commission is taking aim at a law forcing retirement of judges at age 62 instead of 70, widely viewed as a ploy to stack the courts with political loyalists. The new head of the judicial office has overweening powers to manage the courts, appoint judges, and allocate cases.

The central bank law allows ministers to vet the agenda of Monetary Council and take part in meetings. The governor has to swear an oath of loyalty and lacks secure tenure.

"Governments must refrain from seeking to influence their central bank," said EU economics commissioner Olli Rehn. "Certain provisions in the new constitution are in breach of these principles. This needs to be addressed before we can start formal negotiations on the requested EU/IMF financial system."

The warning is clear. Hungary will be left at the mercy of hostile markets until it bows to EU pressure.

Deputy premier Tibor Navracsics played down concerns yesterday, saying a solution could be found to concerns about the central bank and data protection. He yielded no ground on treatment on the judiciary.

Hungary faces ruin as EU loses patience - Telegraph