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Hungary Wins EU Go-Ahead for Aid Talks as Economy Teeters

Hungary won the go-ahead from the European Commission to pursue a financial-aid package after Prime Minister Viktor Orban scaled back attempts to exert control over the central bank.

Five months after Orban pleaded for a bailout, the European Union executive cleared the way for the start of talks on a joint program from the EU and the International Monetary Fund to shore up the recession-threatened country’s finances, currently saddled with a junk credit rating.

The EU is “ready today to enter into the negotiations on financial aid that Hungary asked for,” commission spokesman Olivier Bailly told reporters in Brussels today. The next step is to examine the “modalities of these discussions,” he said.

Hungary’s currency rallied the most in three years since yesterday and bonds rose on expectations that the EU, battling a flare-up of the debt crisis in the euro area, would seek to halt the spread of economic distress by allowing Orban’s government to tap aid.

The forint advanced 2.1 percent to 288.2 per euro at 3:00 p.m. in Budapest, extending its two-day advance to 3.8 percent, the most since April 2009. The government’s benchmark 10-year bonds jumped, cutting yields 60 basis points to 8.2 percent.

‘Like No Tomorrow’

“Everyone is closing short positions like there’s no tomorrow,” Daniel Bebesy, who helps oversee $1.5 billion, mostly in Hungarian government bonds at Budapest Fund Management, said by phone. “We had been pessimistic about the outlook for an IMF deal. Now it seems the rally may continue.”

Orban, a student leader during Hungary’s transition from communism to democracy now in his second stint as prime minister, was the focus of the Brussels-Budapest clash. Back in power since 2010, he has met with criticism for using a two- thirds majority in parliament to skew Hungary’s system of checks and balances in his party’s favor.

While Orban bowed to some European demands to amend a law that extended government oversight over the Hungarian central bank, the European Central Bank on April 5 said it still has “serious concerns” about possible political meddling with monetary policy.

Orban promised “additional commitments and clarifications” on the central bank regulation, the commission said in a statement today, adding that it would close the case once the changes are adopted by the Hungarian Parliament.

‘Satisfied to Acknowledge’

The government pledged to the European Commission not to name an additional vice president to the Magyar Nemzeti Bank, nor expand the rate-setting Monetary Council until central bank President Andras Simor’s term ends in 2013, Tamas Fellegi, the country’s chief negotiator for a bailout, told reporters in Budapest today.

Orban’s administration is ready to go to court on prior objections to a reduction of Simor’s salary and the oath the governor is required to take, Fellegi said, adding that he has no indication so far on whether the commission will file a lawsuit.

The bank “is satisfied to acknowledge that the government made guarantees in the interest of central bank independence in line with the EU treaty,” it said in a statement today.

Adopting Changes

Hungary can start financial aid talks with the EU and the IMF once the pledged changes are adopted, Gyula Pleschinger, state secretary at the Economy Ministry, told reporters today in Budapest.

An accord may be concluded by the third quarter of this year, Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in an e-mail today.

Orban only went part of the way to meeting calls to rewrite laws that the EU said give his ruling party too much authority over the appointment of judges and the independent data- protection commissioner. The commission, the EU’s executive, will appeal to the EU’s supreme court to force Hungary to fix those laws.

Orban made his case to Jose Barroso, the commission’s president, in Brussels yesterday. He told reporters afterwards that obstacles to aid talks have “essentially been surmounted.”

‘Limited Appetite’

European consent for the talks “probably reflects a combination of the changes/concessions made by the Hungarian government, but also by the broader context of a continued/deepening in the euro-zone periphery crisis, and perhaps limited appetite for another potential crisis in an EU member state,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mail yesterday.

An EU member since 2004, Hungary pushed its budget deficit below the bloc’s limit of 3 percent of gross domestic product only once, in 2011, thanks to the onetime nationalization of private pension funds. In March, EU finance ministers voted to suspend 495 million euros ($655 million) in regional subsidies as of next year unless Hungary cuts the deficit.

Hungary can “safely” meet its deficit targets of 2.5 percent of GDP in 2012 and 2.2 percent in 2013, the Economy Ministry said on April 23. The government is counting on economic growth of 0.1 percent in 2012, at odds with an Organization for Economic Cooperation and Development forecast of a 0.6 percent contraction.

The government said this week it will introduce new taxes and cut spending to meet deficit targets required to unlock EU grants. The Cabinet plans additional savings of 150 billion forint ($680 million) this year and 600 billion forint in 2013 on top of measures announced last year.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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