Trichet legal threat will not stop central bank reshuffle

Hungary is set to go ahead with appointing four new external members to the Monetary Council of its central bank, under the new nomination rules passed by parliament, despite stark remarks by the president of the European Central Bank threatening legal action against Hungary, London-based emerging markets analysts said.

Jean-Claude Trichet said at a news conference earlier that the ECB was "very unsatisfied" with the Hungarian government's position regarding the change in Hungary's Central Bank Act which authorizes Parliament to appoint all four new members to the Monetary Council. Trichet hinted that the EU Commission may decide to sue Hungary should it find the new nomination process in breach of EU law.

London-based analysts at Goldman Sachs said, however, that while "this is, in general, negative news, we do not think that a threat of an EU action will stop the government and Parliament from appointing the four new members".

"It is also unlikely that those new members may be forced to leave office even if the EU court rules that Hungary has violated EU laws by changing the appointment process".

But it "clearly shows that the ECB believes the change has potentially reduced the central bank's independence, with negative consequences for its credibility", Goldman Sachs said.

There is very little time left for the EU to act as Parliament will vote on the new candidates already next week, and any court case would be lengthy, with the process potentially lasting up to two years before a final ruling, the analysts said.