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Forint Falls as Hungary Aid Talks Interrupted by EU on Bank Law

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Dec. 16 (Bloomberg) -- The forint dropped after the European Union, in coordination with the International Monetary Fund, interrupted talks with Hungary on an aid package because of concern about the effect of a draft law on the central bank.

Hungary’s currency depreciated 1.4 percent to 305.6 per euro, the worst performance among more than 20 emerging-market currencies tracked by Bloomberg today and bringing the weekly drop to 1.2 percent. The government’s benchmark 10-year bonds slumped, lifting the yield 10 basis points to 9.066 percent. The BUX stock index pared gains to 0.2 percent by the close in Budapest, from as much as 2.6 percent earlier.

The EU’s most-indebted eastern member last month reversed course following more than a year of shunning international assistance after the forint weakened to a record low against the euro. The European Commission withdrew from talks citing concern a draft law may undermine the independence of the central bank, Amadeu Altafaj, a spokesman for Economic and Monetary Affairs Commissioner Olli Rehn, said today in an e-mailed statement.

“We will see the markets push weaker, and arguably will likely get much weaker before the government is willing to go the extra mile to cut a deal with the IMF,” Timothy Ash, a London-based economist at Royal Bank of Scotland Plc, wrote in an e-mail.

The draft law would curb the power of central bank President Andras Simor by giving his right to name vice presidents to the prime minister and the country’s president. It would also expand the central bank’s rate-setting Monetary Council to as many as nine members from seven and the number of central bank vice presidents to as many as three from two.

‘Total Takeover’

Simor called the move part of a government effort for an “almost total takeover” of the central bank and the European Central Bank said it is concerned the changes will hurt the Magyar Nemzeti Bank’s independence.

Hungary will incorporate the ECB’s proposals into the draft law, Tamas Fellegi, the country’s chief representative in the IMF talks, said in an e-mailed statement. Hungary “is ready for talks without preconditions,” with the two institutions, Fellegi said in an e-mailed statement today.

“Discussing a program with the IMF was never going to be easy to start with and the Hungarian government really did not need to make it that difficult for itself,” Benoit Anne, London-based global head of emerging markets strategy at Societe Generale SA, wrote by e-mail today.

Default Swaps

The cost of insuring against a default on Hungary’s government bonds with credit-default swaps rose to 582 basis points from 578 basis points yesterday.

The forint strengthened earlier as Prime Minister Viktor Orban met with bank chief executives after reaching a deal to share the cost of easing foreign-currency borrowers’ debt burden. Orban’s government also promised to cut the nation’s bank tax from the highest in Europe, and to consult lenders before taking further action.

That contrasts with the government’s unilateral September decision to force banks to swallow losses on foreign-currency loans by allowing borrowers to repay at discounted exchange, which the banks said may cost them as much as 200 billion forint ($868 million).

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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