Hungary under pressure to change course

Tue Jan 3, 2012 9:45am EST
 
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By Krisztina Than and Gergely Szakacs

BUDAPEST (Reuters) - Pressure grew on Hungary to change its policies to satisfy international lenders on Tuesday after bond yields jumped above 10 percent and the European Commission told the government to safeguard the central bank's independence.

Investors fear the government's refusal to meet EU and IMF demands could derail a hoped-for financing deal, leading to a full-blown market crisis.

Yields on 5-year and 10-year bonds rose to around 10.40 percent, the highest since June 2009 in illiquid trade, up about 50 basis points on the day before retreating slightly in afternoon trade.

The ruling Fidesz party pushed through a controversial central bank law in parliament last week despite EU requests to withdraw it, and Prime Minister Viktor Orban looks to be sticking to his government's unorthodox economic policies.

The government denied a news report on Tuesday which said it was considering tapping part of the central bank's foreign currency reserves to fund economic stimulus. But the government did not address another point in the report suggesting reserves could be used to repay local government debt.

The new central bank law is part of a campaign by Orban's Fidesz government to strengthen its influence over media and public institutions that has prompted protests from business, investors and the EU.

"In our view, there is only one reason for the escalation in the sell-off in the Hungarian markets and that is the increasingly erratic communication from the Hungarian government," Danske Bank said.

"The Hungarian government's rhetoric has become increasingly hostile towards international investors, the EU, the IMF, rating agencies and the country's own central bank. Unsurprisingly, this is scaring international investors."   Continued...