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Hungary Crisis Stokes Fears of Debt Contagion

  • Henry Ridgwell

Hungary's PM Viktor Orban addresses the European Parliament in Strasbourg, Jan. 18, 2012

Hungary's PM Viktor Orban addresses the European Parliament in Strasbourg, Jan. 18, 2012

The European Union is launching legal action against Hungary over new legislation passed in Budapest, which the EU claims breaks European law. The Hungarian laws covering regulation of the central bank, the judiciary and the governments' data protection office took effect on New Year's Day.

EU officials say the new laws threaten the independence of those institutions. It’s the latest escalation in a row that threatens to derail Hungary’s economy - and comes as fears grow that Europe’s debt crisis is spreading east. Meanwhile, Hungarian officials say they are ready to modify some of the controversial laws.

The European Commission President Jose Manuel Barroso said Wednesday it is time to act against recent legislation passed in Hungary that appeared to breach EU law.

“The college has just decided to launch infringement proceedings against Hungary on three issues, the independence of the national central bank, the retirement age of judges and the independence of the data protection authority," said Barroso.

Later on Wednesday, commission president Barroso said he had received a letter from Hungarian Prime Minister Viktor Orban that Hungary planned to modify some of the legislation that has raised EU concerns about democratic rights. Barroso said the Hungarian president had indicated he is willing to work with the EU commission.

An estimated 2,000 people converged in the Hungarian capital Saturday to demand a withdrawal from the EU. Csanad Szegedi, a member of the European Parliament singled out the European Commission president.

"Our problem is that the Barroso-types, elected by nobody, have thrown the Europe of nations to the mercy of global financial circles," said Szegedi. "Hungary has been occupied.”

Polls show support for Hungary’s far right is rising, just as the country tries to battle bankruptcy.

Talks between Hungary and its lenders, the EU and the IMF, derailed late last year. Neil Shearing is from the analyst group Capital Economics.

“First and foremost you have a government that has completely lost the trust of markets," said Shearing. "You have a government that has antagonized the international financial institutions, the IMF, the EU, the ECB [European Central Bank] through various reasons, assaults on the central bank’s independence. But at the same time this government is incredibly popular at home.”

Hungary is not part of the eurozone. Its own currency, the forint, has plunged in value. With government bond yields soaring, Hungary’s Prime Minister Viktor Orban has been forced to make a reluctant return to lenders to seek a bailout. Again, economist Neil Shearing:

“That against a backdrop of huge amounts of foreign currency borrowing that Hungary undertook in the latter part of the last decade and the brewing crisis in the eurozone, and strong trade and financial linkages with western Europe is obviously a very combustible mix," he said.

Single mother Diana Maroevich took out a Swiss francs loan to buy her apartment in 2007. Since then, her repayments have gone up sharply as Hungary’s currency has weakened.

The government was forced to step in to help hundreds of thousands of Hungarians stuck in similar situations. Maroevich says she was close to bankruptcy.

“In about half a year we could get back on track with our flat mortgage and it would be the end of our sleepless nights," said Maroevich.

But analysts say Hungary’s troubles are not over - and the risks of a default and a threat to other eastern European economies are real.

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