"Will no one rid me of this turbulent central banker?" Hungarian Prime Minister Viktor Orban may not have voiced this sentiment but since he took power last year he is likely to have thought it more than once. Increasingly, the spat between Orban's government and central bank governor Andras Simor brings to memory the quarrel England's Henry II had with his Archbishop of Canterbury, Thomas Becket, over the rights and privileges of the Church almost 900 years ago. Simor stands accused of undermining economic growth by holding interest rates too high and resisting government demands for monetary stimulus. The government's efforts to sideline Simor are viewed as infringing on the central bank's independence.
So far, attacks on Simor have ranged from alleging he has undisclosed overseas income to stripping him of his power to appoint some central bank board members. But the government's latest plan could be the last straw -- proposed legislation that would effectively demote Simor or at least seriously dilute his influence. Simor says the government is trying to engineer a total takeover at the central bank. "The new law brings the final elimination of the central bank's independence dangerously close," he said last week.
The move is ill-timed however, coming exactly at a time when Hungary is trying to persuade the IMF and the European Union to give it billions of euros in aid. The lenders have expressed concern about the law and declined to proceed with the loan talks. But the government says it will not bow to external pressure and plans to put the law to vote on Friday. That has sparked general indignation - Societe Generale analyst Benoit Anne calls the spat extremely damaging to investor confidence in Hungary. "I just hope the IMF will not let this go," he writes.
Central banks and governments often fail to see eye to eye. But in Hungary, the government's attacks on Simor, a respected figure in central banking and investment circles, is hastening the downfall of the already fragile economy. For one, if IMF funds fail to come through, Hungary will need to find 4.7 billion euros next year just to repay maturing hard currency debt. That could be tough at a time when lots of borrowers -- developed and emerging -- will be competing for scarce funds. Central European governments alone will be looking to raise 16 billion euros on bond markets, data from ING shows. So Orban will have to tone down his rhetoric if he is to avoid plunging his country into financial disaster.
But this week the tussle has intensified as the central bank has shrugged off Orban's call for more "growth-friendly policies" and raised interest rates by half a point. The rate rise, the second in as many months, brings interest rates to 7 percent, sparking rage in the ruling party. But the central bank, quite logically, argues higher rates are necessary to protect Hungary's currency, the forint, from further weakness. And it has signalled it is fully prepared to raise rates again at the next meeting if required.