Hungary's government found itself under fire from all sides Thursday over its planned overhaul of the central bank that analysts say will hit investor sentiment just as the cash-strapped EU member seeks IMF help.
According to an amendment tabled by a parliamentary committee late on Wednesday, Prime Minister Viktor Orban's all-powerful government intends to merge the Magyar Nemzeti Bank (MNB) central bank with Hungary's financial regulatory body.
This will mean the effective demotion of the current central bank head, Andras Simor, who in March complained of government "bullying," by making him joint head of the new body alongside the current regulatory chief, analysts said.
"This is essentially a political move to undermine the central bank governor, who happens to be highly regarded among the international investor community," Societe Generale's head of emerging markets strategy, Benoit Anne, told AFP.
"What we are talking about here is the disappearance of the central bank."
Orban's chief of staff Mihaly Varga said on Thursday that the move, due to be discussed in parliament on Friday, was because of past failures in the European Union member state, whose debt was downgraded to "junk" status by Moody's last month.
"Hungary has to reconsider, that if in the past years it did not manage to stop the country sinking into debt and to reduce the percentage of foreign-denominated loans, whether the system worked well," Varga told TV2 private television.
"It appears it did not."
Orban's government, which took office with a crushing two-thirds majority in April 2010, has repeatedly castigated the central bank for monetary policies that it said went against the government's goal of boosting growth.
In October 2009, Hungary became the first EU member to seek International Monetary Fund help but the newly elected Orban walked out of talks in July 2010.
A sharp fall in the forint then forced the government last month to knock on the IMF's door again.
Orban also plans a separate central bank law ceding to the government Simor's powers on proposing his deputies, and increasing the number of political appointees deciding on monetary policy.
"This is a new and now total takeover of power at the central bank," Simor himself told website Index.hu in an interview on Thursday, which "brings the final elimination of the central bank's independence dangerously close."
The European Commission meanwhile said it was "concerned about the intention of the Hungarian authorities to push forward with the adoption of laws that can potentially undermine the independence of the central bank."
The IMF was "carefully examining the recent legislative proposals with respect to the central bank, and erosion of central bank independence would be a great concern," spokesman David Hawley said in Washington.
The European Central Bank said that some of the planned changes sparked concerns about possible influence on "the decision-making process to the detriment of central bank independence."
Zsolt Kondrat from MKB Bank, meanwhile, said the decision was a "bad opening move" in Hungary's negotiations in the new year with the IMF and the European Union on a possible bailout, expected to be worth 15-20 billion euros ($19-26 billion).