Bloomberg News

Hungary Default Risk Jumps to Record as Forint Sinks on Junk Cut

November 27, 2011

Nov. 25 (Bloomberg) -- The cost of insuring Hungarian debt against default climbed to a record, bond yields rose to a two- year high and the forint tumbled after Moody’s Investors Service cut the country’s rating to junk.

The credit-default swaps used to hedge against non-payment on the country’s five-year debt rose to 646 basis points from 603 basis points yesterday, the highest ever on a closing basis in New York, according to data provider CMA at 5 p.m. in Budapest. The government’s 10-year bonds slid, lifting the yield above 9 percent for the first time since 2009. The forint traded 1.2 percent weaker at 315.2 against the euro, extending declines since June to 16 percent.

Moody’s lowered Hungary following 15 years at investment grade after Prime Minister Viktor Orban reversed a policy of shunning the International Monetary Fund to request assistance, while insisting he doesn’t want conditions attached to any new credit line. The forint slumped the most among currencies worldwide in the second half as concern deepened the European Union’s most-indebted eastern member will struggle to meet funding needs.

“They’ll either have to strike a quick deal with the IMF or the market will force them to,” Viktor Szabo, London-based portfolio manager at Aberdeen Asset Management, who helps manage about $7 billion in emerging-market debt, said in a telephone interview. “If the European crisis continues Hungary may remain among the worst performers.”

Foreign- and local-currency bond ratings were cut one step to Ba1, the highest junk-level score, from Baa3, the company said in a statement late yesterday. Moody’s assigned a negative outlook and said the country’s “recent requests for assistance from the IMF and the EU illustrate the funding challenges facing the country,” according to the statement.

Stocks, Bonds

Hungary’s benchmark BUX index fell 3.1 percent to 16,454.2, the biggest drop since Nov. 2, as OTP Bank Nyrt., the nation’s biggest lender, declined 6.1 percent.

The yield on Hungary’s benchmark 10-year bonds climbed 73 basis points to 9.56 percent, the highest since June 2009. That compares with 10-year yields near 12 percent for Portugal and more than 26 percent for Greece, according to generic prices compiled by Bloomberg.

Yields for similar-maturity Polish bonds were at 6.1 percent and Czech debt at 4.2 percent. German yields were 2.3 percent, data compiled by Bloomberg shows.

IMF Insurance

The government has scrapped two debt sales and reduced the size of another eight auctions in the last three months as the euro region’s debt crisis deepened. Orban’s Cabinet on Nov. 17 asked for IMF “insurance” that doesn’t entail a loan and doesn’t impose conditions.

“Hungary’s bond market is on the verge of collapse,” Imre Tajti, who helps oversee about $1.3 billion as senior investment manager at the Hungarian fund unit of ING Groep NV, wrote in an e-mailed report. “The forint may slump to new record lows but central bank interventions and interest rate increases may have a stabilizing effect.”

Investors in Hungarian interest-rate derivatives increased bets the central bank will raise borrowing costs to defend the forint after the credit downgrade. Forward-rate agreements fixing three-month interest in one month jumped to 7.015 percent from 6.74 percent yesterday, pushing the spread against the Budapest Interbank Offered Rate to 38 basis points, from 23 basis points the day before the downgrade.

‘Financial Attack’

The country was the first EU member to obtain an IMF-led bailout in 2008 and had the highest government debt level among the bloc’s eastern members last year at 81 percent of gross domestic product.

“Hungary’s attempts last week to voice readiness to cooperate with IMF was a ‘show’ which was meant to prevent the rating agency action, yet it did not help given Hungary’s unwillingness to compromise,” Aurelija Augulyte, a Copenhagen- based emerging-market analyst at Nordea Bank AB, wrote in a research report today.

Moody’s downgrade has “no basis” and is part of a “financial attack” against the country, the Budapest-based Economy Ministry said in an e-mailed statement today, a day after the government announced that it has asked the national security services to help find out who is behind the “concentrated speculative attacks” against the forint.

Orban has relied on one-off measures, including the nationalization of $14 billion of mandatory private pension funds and extraordinary industry taxes to offset a swelling budget, whose deficit reached 193 percent of the Cabinet’s annual goal through October.

“The current economic policy makers just cannot countenance going down any other routes,” Aberdeen’s Szabo said. “They have a vision and any failure just provokes denial.”

--With assistance from Krystof Chamonikolas in Prague and Stephen Kirkland in London. Editors: Linda Shen, Kristen Hallam

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

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


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