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2011-12-30 12:20:39
30 December 2011 Last updated at 08:37 GMT
Hungary is close to passing a law that critics say could undermine the
independence of its central bank.
The ruling Fidesz party, which has a two-thirds majority, is due to approve the
constitutional change in the final session of parliament this year.
Ratings agency Standard & Poor's downgraded Hungary's debt to junk status last
week, partly due to the proposed changes to the constitution.
And EU and IMF officials have cut short aid talks with Hungary over to the law.
Hungary had been seeking a standby credit line of 15-20bn euros ($19.5bn,
12.6bn) in case it ran into trouble issuing new debt.
But the International Monetary Fund and the European Commission have both cast
doubts over aid because of the law.
On Thursday, Hungary abandoned part of a planned bond auction, when investors
demanded a higher interest rate on the debt the country planned to issue.
Hungary's central bank governor, Andras Simor, has said the proposed bill
amounts to a takeover of the central bank.
International pressure
The government wants to keep interest rates low to boost growth - but last
week, Hungary's central bank increased rates for the the second month in a row,
to 7% from 6.5%.
"Some amendments have been made since the original draft was presented before
the Christmas holiday, but concerns remain that the essence of the law has not
changed," said the BBC's Eastern Europe reporter Nick Thorpe.
"The reform of the bank would introduce deputy governors and allow the
government greater potential influence over key aspects of monetary policy,
such as the level of interest rates."
Hungary was given a 20bn-euro standby loan by the IMF in 2008 to prevent it
having to default on its debts.
But the newly-elected Prime Minister Viktor Orban decided not to renew the
standby facility last year.
Standard & Poor's has cited heightened risks to the country's ability to repay
its debts due to the weakening domestic and global economic outlook.
"In our view, the predictability of Hungary's policy framework continues to
weaken, harming Hungary's medium-term growth prospects," S&P said.
Last month, fellow ratings agency Moody's also downgraded Hungary to junk
status, blaming the economy's high levels of debt and weak prospects for
growth.