Two of the three major American credit rating agencies downgraded Hungarian sovereign bonds to junk status this month, citing the “increasingly erratic” and “unorthodox” economic policies of Prime Minister Viktor Orbán’s government as well as concerns over the independence of the country’s central bank.
The constitutional reforms enacted by Orbán’s right-wing administration in April of this year enabled the government to appoint members to the monetary council of the Hungarian National Bank which, in the view of the credit raters, significantly weakens the institution.
Moreover, a bill pending before parliament would allow the president to appoint the central bank’s deputy governors who are currently elected by the bank’s chairman. The bank’s monetary council, moreover, which sets interest rates, would be expanded by two members, presumably economists who share Orbán’s nationalistic economic vision.
The European Commission has urged the Hungarian leader to withdraw the legislation, warning that it could “undermine the independence of the central bank.” The International Monetary Fund has echoed those sentiments, describing an independent central bank as “one of the cornerstones of sound economic management.” The European Central Bank has demanded that Hungary “bring their consultation practice into line with the requirements of European Union law and to respect the obligation to consult the ECB.”
The central bank is but the latest institution stacked with ruling party loyalists. Fidesz allies have been appointed to the presidency, the state prosecution, a new fiscal council, the National Media Authority and a new National Courts Authority which critics fear could impede the effectiveness of the judiciary.
Officials claim that party backgrounds are irrelevant and that democracy in Hungary is safe. Opposition politicians, the European Union and the United States are skeptical however and see the attempts to limit the central bank’s independence as a one more step toward removing the checks and balances that are necessary to sustaining a representative democracy and the rule of law.
Prime Minister Orbán has similarly been criticized abroad for his economic policies. Standard & Poor’s specifically mentioned the raised levies on the communications, energy, financial and retail industries as a factor in their decision to lower Hungary’s growth forecasts and therefore its solvency. Budapest during his premiership nationalized its compulsory private pension scheme and instituted a flat tax which, although conducive to business activity, has exacerbated the government’s shortfall to such an extent that it will likely struggle to refinance and repay international loans next year and may even need European financial support to pay its bills.
In the wake of the downgrades to junk status, yields on ten year Hungarian bonds rose over 9 percent, well above the levels where Greece, Ireland and Portugal were forced into bailouts.
If Hungary has to tap into Europe’s stability fund, European Commission president José Manuel Barroso has hinted that it will will have to implement structural reforms in exchange.
In a letter to Orbán that was obtained by the Financial Times last week, Barroso insisted that “the origin of Hungary’s economic and financial troubles predominantly lies in the domestic policy decisions and measures. Therefore,” he added, “a possible program should carry appropriate policy conditionality.”
Among the conditions listed by the president were adherence to European debt and deficit limits — a goal set by Orbán himself — central bank independence, financial sector reforms and “consultation on policy initiatives,” which could see Hungarian legislation preapproved by the commission before it is put to parliament.
As Hungary’s economic crisis has deepened, the popularity of Orbán’s Fidesz party has plummeted down from a 45 percent approval rating at the time of elections last year to slightly over 20 percent in November.