Bloomberg News

Hungary Junk Risk Sends Yield to 2-Year High as Debt Sale Fails

November 15, 2011

Nov. 14 (Bloomberg) -- Hungarian bonds tumbled, raising a benchmark yield to the highest in more than two years as the forint weakened and a government debt auction failed on mounting concern the country will lose its investment-grade rating.

The forint was the world’s worst-performing currency today, losing 1.5 percent to 315.29 per euro by 4:45 p.m. in Budapest. The yield on notes due in 2017 surged 48 basis points, or 0.48 percentage point, to 8.632 percent. The cost of insuring the debt against default surged to the highest since March 2009.

Standard & Poor’s will likely decide on the country’s BBB- credit grade this month, it said in the U.S. late on Nov. 11 after placing Hungary on “CreditWatch with negative implications.” Fitch Ratings cut the outlook on Hungary’s lowest investment grade to negative from stable that day.

The rating outlook revision “risks adding fuel to fire given the performance of the forint of late,” BNP Paribas SA strategists led by Bartosz Pawlowski in London wrote in a report today. “We continue to expect a ratings downgrade to Hungary by the end of the month” and “a sub-investment grade rating risks outflows” from the local bond market, the strategists said.

Hungary’s “unpredictable” policies, including the dismantling of checks on policies, levying of extraordinary industry taxes and forcing lenders to swallow exchange-rate losses on loans, are harming investment and growth at a time when the economic environment is deteriorating, S&P said.

‘Vulnerabilities’

The most indebted of the European Union eastern members got an International Monetary Fund-led bailout in 2008 to avoid default. Prime Minister Viktor Orban rejected renewing the IMF loan after winning elections last year, saying he wanted more freedom to pursue “unorthodox” policies aimed at cutting Hungary’s debt level while trying to meet a campaign pledge to end years of austerity measures.

“The rating agencies no longer buy into the government’s strategy” as the measures “risk creating significant longer- term structural vulnerabilities for public finances,” Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc, wrote in an e-mailed report today.

Hungary rejected all bids at a six-week Treasury-bill sale today, where the state sought 50 billion forint ($216 million). Orders totaled 36 billion forint, auction results published by the government’s debt-management agency on Bloomberg show. The country sold only half of the planned amount of 12-month T-bills on Nov. 10 as yields rose to a two-year high, after failing to raise any money at a sale of the same maturity on Oct. 27.

‘Capital Flight’

The cost of insuring Hungary’s bonds for five years with credit-default swaps is the second-highest in emerging Europe after Ukraine, according to CMA data compiled by Bloomberg. The contracts, which rise as perceptions of creditworthiness worsen, added 35 basis points to 602, the highest since March 2009, when the default swaps reached an all-time high of 639 points.

The forint has since June 30 depreciated 16 percent against the euro and 21 percent versus the dollar, the biggest rout for the period of around 170 currencies tracked by Bloomberg.

“The forint’s weakness appears to be reflecting capital flight,” currency strategists at Brown Brothers Harriman & Co. led by New York-based Marc Chandler wrote in an e-mail to clients today. “The risks are increasing that Hungary is forced back into the arms of the IMF.”

OTP Bank Nyrt., the biggest lender in Hungary, slumped 7.8 percent, the most in almost two months, leading the country’s BUX stock gauge down 2.8 percent. The Czech Republic’s PX Index slid 0.3 percent and Poland’s WIG20 rose 1 percent.

--Editors: Peter Branton, Linda Shen

To contact the reporters on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net; Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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