Hungary retreats from the free market

Hungary's Finance Minister, Laszlo Bekesi, returns from his winter break this week amid rising fears that the free-market policies he champions have been abandoned in his absence.

The immediate problem confronting him in the in-tray will be the disastrous fall-out from the failed attempt to sell off the country's last state-owned hotel chain. Over and above that, he will be plunged into a fierce debate about the whole course of privatisation in Hungary - and what his own role in that process will now be.

The debate, which has exacerbated tension between the Socialists and Free Democrats in the ruling coalition, has been triggered by the extraordinary sequence of events surrounding an attempt by the American General Hospitality (AGH) hotel management group to buy some 14 hotels in the HungarHotels chain. Its outcome, moreover, will have a crucial bearing on the extent to which Hungary will be able to continue attracting much-needed foreign investment.

The row over HungarHotels first erupted last month after Gyula Horn, the Socialist Prime Minister, personally blocked a deal struck between AGH and the State Property Agency. Under the terms of the original deal, the American group agreed to pay $57.5m (£38m) for a 51 per cent stake in the chain, a price deemed by Mr Horn to be too low. After a hastily conducted investigation, the Government Control Office backed up this view and AGH was asked to come up with $67m for the chain (now extended to 15 hotels). Last week AGH announced it was pulling out altogether. On the same day, Ferenc Bartha, the privatisation commissioner who negotiated the original deal, resigned.

Among the howls of protest over Mr Horn's unprecedented action, the one from Mr Bekesi, who is also a member of the Socialist party, was the most telling. "If political intervention attempts to deter market conditions . . . it creates an unstable atmosphere," he told the daily Magyar Hirlap. "Investors become uncertain."

As news of the collapse of the HungarHotels deal sank in, would-be foreign investors were, indeed, unanimously critical. "This is hardly going to encourage Western companies to rush here," said one Western diplomat. "Inevitably they will always be afraidthat just when they think they have a deal the rules are suddenly going to be changed."

Many ordinary Hungarians, however, support Mr Horn, who has been widely acclaimed for having stood up for Hungarian interests and for having, in the words of one newspaper editorial, shown that "Hungary can no longer be viewed as a banana republic for foreign investors".

Against the backdrop of investments totalling more than $7bn since 1989, the HungarHotels deal is relatively small. Its significance lies in the fact that, if successful, it would have been only the second important privatisation concluded since the Socialist-led government came to power last July and would have provided impetus for the planned sales later this year of the massive gas and electricity public utilities.

According to some observers, the failure of the deal indicates that the anti-Bekesi, anti-privatisation wing within the Socialist party - the successor to Hungary's former Communist Party - may now be in the ascendancy.