Hungary's central bank: a chink in Orban's armour

(BUDAPEST) - Hungarian Prime Minister Viktor Orban is so secure domestically that he can ignore the current storm of foreign criticism, but moves to increase control over the central bank could be his Achilles heel.

Since coming to power for the second time in mid-2010, this time with a crushing two-thirds majority in parliament, Orban has embarked on a path that critics say is taking the EU member in a distinctly undemocratic direction.

A media law that came into force almost a year ago constitutes a major attack on press freedom, according to rights groups and governments abroad. Last week four Hungarian journalists went on hunger strike.

It obliges online media, for example, to provide "balanced coverage", can force journalists to reveal sources on grounds of national security and creates a powerful new media authority dominated by government appointees.

Reforms to the justice ministry and a new constitution, meanwhile, prompted EU justice commissioner Viviane Reding last week to write to Budapest expressing her "serious concerns from an EU law perspective."

Last Tuesday parliament elected a friend of Orban to head the judiciary in a move slammed by Transparency International's Hungarian branch as making it "highly unlikely" that the judiciary can stand up to the executive.

Orban has also placed close allies in key institutions like the public prosecutor's office, the state audit office, the constitutional court and the national budget authority.

"Taken together, all this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe," Nobel Prize-winning economist Paul Krugman said in the New York Times last week.

A weakening economy has hit support for Orban's Fidesz party, but analysts say that the opposition is too divided to profit. The only party that is winning popularity is the far-right, anti-Semitic and anti-Roma Jobbik, according to polls.

In any case a new electoral law in the works looks set to tilt the system more in favour of Fidesz, according to Eva Balogh who runs the English-language blog Hungarian Spectrum (http://esbalogh.typepad.com/).

"In brief, Orban is trying to build a system in which there be an opposition giving the appearance of democracy, but where the opposition will be so weak that it will not be able to exert any influence," Balogh said in a posting last week.

What may damage Orban though is his pressing need for outside financial support to prop up an economy hit hard by a sharp fall in Hungary's currency, the forint, and the eurozone crisis hitting demand in its main export markets.

Moody's last month cut its rating on Hungarian debt to "junk" status and many experts see the government's forecast of 0.5-percent economic growth in 2012 as optimistic, with the OECD for example predicting a 0.6-percent contraction.

Having walked away from talks with the IMF in July 2010, Orban went back to the Washington lender cap-in-hand last month, seeking an IMF-EU credit line of some 15-20 billion euros ($19-26 billion).

But IMF and EU officials cut short on Friday a visit to Hungary because of concerns about another of Orban's proposed areas of reforms -- the central bank -- although Budapest denied any breakdown in negotiations.

Orban wants to reduce the powers of the central bank chief, increase parliament's influence in setting interest rates in order to boost growth and to merge the lender with the financial regulatory body.

Internationally respected bank chief Andras Simor said Thursday that the revamp was a "total takeover of power at the central bank (which) ... brings the final elimination of the central bank's independence dangerously close."

Apart from harming its chances of getting IMF-EU help, the uproar is also bound to make foreign companies even warier about investing in Hungary, something which is vital for the economy, analysts said.

"When you are faced with a severe external environment, the best you can do as a government is to maintain the highest standards of credibility," Societe Generale's head of emerging markets strategy, Benoit Anne, told AFP.

"Unfortunately they have failed to do that."

"The government has no other option but to come to terms with the EU and the IMF, otherwise Hungary will face a currency exchange crisis," Krisztian Szabados, director of the Hungarian think tank Political Capital, told AFP.

"If the Hungarian forint slides towards 320-330 forints to the euro (from the current 300-305 forints), one million households will go bankrupt."