BRUSSELS (MNI) – The European Union and the International Monetary
Fund will not start formal talks with Hungary on a financial assistance
package until the independence of the national central bank is
clarified, a spokesman for the European Commission said Thursday.

“We will take a decision on the opening of formal talks when we
have clarity on the legal environment regarding financial stability in
Hungary,” the spokesman said. “We are currently analyzing the new law on
the central bank and we are confident we can get this legal analysis
very soon. On that basis we will decide whether the independence of the
central bank is fully in line with the EU treaties. Then we will be
ready to open talks with the Hungarian authorities. Until then we will
not take any decision.”

Central bank independence is “indispensable,” and it is “not just a
concern for the Commission but also the IMF, ECB, and the markets,” the
spokesman said. “It is now for the Hungarian authorities to decide how
they want to reassure investors about the certainty of the legal
environment in Hungary.”

EU Commissioners will discuss the situation in Hungary at their
meeting next week and could decide on legal action against Budapest, if
their legal analysis confirms that the new constitution breaches EU law,
the spokesman said.

The EU and IMF broke off preliminary discussions with the
government of Prime Minister Viktor Orban in December because of
objections to planned constitutional changes, since adopted, that give
Budapest greater sway over its central bank’s decisions.

Even though Hungary faces no immediate pressure to refinance itself
in the bond markets, rapidly rising bond yields will likely force
Orban’s government to back down and reverse the laws in order to secure
aid, analysts say.

“They will have to do what they are told,” said Wolfgang Ernst, an
analyst at Reiffeisen International Bank in Vienna. “They will have
little opportunity to muddle through with their unorthodox measures.”

“Hungary has done quite some pre-financing in the past months, so
it is not that urgent that they will need an IMF package in the very
short term. But from a perspective of getting investors’ confidence back
it is extremely important to act fairly fast,” Ernst said. “Given the
extreme rise in CDS spreads and bond yields and the depreciation of the
Florint, the Hungarian government will be forced to speed up a deal,
which we still expect to come in the first quarter.”

–Brussels bureau: +324-9522-8374; pkoh@marketnews.com

[TOPICS: M$X$$$,M$$CR$,MGX$$$]