The European Commission has launched legal proceedings against Hungary’s government for violations of EU treaty law. Europe wants Hungary to ditch three laws in its new, authoritarian constitution. One forces judges to retire earlier; another replaced the head of Hungary’s data-protection authority; a third undermines central bank independence.
The dispute threatens negotiations with the EU and the International Monetary Fund (IMF) over a loan to stave off bankruptcy. Hungary resumed these talks earlier this year after breaking them off in 2011 amid a dispute over the central bank law.
What the commentators said
Hungary has two options, said Lars Christensen of Danske Bank: “the continuation of economic and political suicide, or a return to normality, the acceptance of the rule of law, and normal conduct of affairs within a democratic market system”. With the government showing scant signs of backing down, and no prospect of financial aid until this legal problem is resolved, Hungary is “playing with fire”.
The economy is sliding into recession; the debt pile is worth 79% of GDP, the region’s highest; and yields on government paper have shot up as prices have tanked. Yields on ten-year debt have exceeded 10%, an unsustainable interest rate. So financing costs are set to rise, straining the government’s dwindling resources further. Without a deal with the IMF and the EU it will run out of money in a few months.
And this isn’t just a question of financing government debt, as Capital Economics pointed out. Hungary’s economy is especially reliant on western European banks. Interbank lending from the eurozone is worth 25% of Hungarian GDP, and most of it has to be rolled over this year. If western banks, which are withdrawing from the region in order to meet tougher capital requirements, “are no longer able or willing” to roll this over, Hungary would have to accept the EU/IMF conditions.
Unfortunately, the government’s wayward and unpredictable behaviour over the past year or so has given banks another “excuse to reduce exposure”, said Timothy Ash of RBS. Hungary’s self-induced crisis is getting worse and worse.