A Quiet Putsch in Hungary?

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A putsch, as any dictionary will tell you, refers to the violent overthrow of a government.  Hungary has not been subject to that kind of action per se, but rather a more insidious grab for power.  Its new constitution goes into effect today, and while perfectly legal, marks the end of Hungary's flirtation with liberalism (meant in the classical sense of "liberty" and not the modern partisan sense).  

On December 30, the Hungarian parliament approved the latest measures ("base laws") to support the constitution and the centralization and consolidation of power that it entails.  This latest measure is what has particularly annoyed the EU and the IMF.  

It emasculates the central bank.  The president can no longer appoint his deputies and may be demoted if the central bank "merges" with the financial regulator.  The interest rate setting Monetary Council will be expanded and a third vice presidency will be created.  

The European Commission objected to various aspects of the preliminary draft of the legislation and Hungary agreed to most of the changes the EC demanded.  However, it did not retreat from efforts that undermine the central bank's independence by allowing the government to exert control via new appointments.  

There have been several other measures undertaken by the Orban government which enjoys roughly a 2/3 majority in parliament that effectively undermine representative government and an open society.  These include the erosion of an independent judiciary and media.  The chief justice of the Supreme Court was removed and the jurisdiction of the Constitutional Court was reduced.  

The independent Fiscal Council has been replaced by with one dominated by Orban loyalists.  The State Audit office is now controlled by Orban's Fidesz party.  A new media regulator has been created and led by other party appointees.  A former prime minister was briefly arrested for criticizing the government.   

The gerrymandering, which includes reducing constituencies and redrawing districts, will result in unchecked and unbalanced political power.   When the question is asked, when did Hungary devolve into a one party state from a multiparty democracy, the answer is now.  

These actions, especially the erosion of the central bank's independence will jeopardize the IMF support the Orban government appeared to indicate desirable after previously rejecting.  

Orban appears to have realized the IMF was not about to give the most indebted and slowest growing eastern and central European country a precautionary line of credit; a facility generally for countries already implementing orthodox policies and achieving some sense of macro-economic balance.  It comes with few strings attached.  Instead, the IMF appears to be offering a standby agreement which comes with extensive conditions.  

The failed auction in late December, when the government raised less than half the funds it sought, may have partly been a function of year-end markets.  Yet the signal is important.  Hungarian interest rates are poised to rise and the forint will extend its depreciation, after falling by 15% against the euro in the second half of 2011.  Hungary is already rated below investment grade by S&P and Moody's.  Further downgrades may be less meaningful.

There is some expectation that IMF negotiation can resume in the coming weeks.  The risk is that these are delayed further by the Orban government's refusal to agree to IMF conditions.    

For citizens and investor are in for a difficult time in Budapest in 2012.