Bloomberg News

Forint Bonds Gain First Time This Year as Hungary Seeks IMF Deal

January 06, 2012

Jan. 5 (Bloomberg) -- Hungary’s 10-year bonds rallied for the first time this year after the government said it seeks a deal as soon as possible to obtain aid from the International Monetary Fund and European Union.

The yield on the 10-year notes fell 35 basis points to 10.475 percent by 5 p.m. in Budapest, the first decline since Dec. 23, according to generic prices compiled by Bloomberg. The 10-year yield rose as high as 11.34 percent earlier today and the state debt agency sold 78 percent of its target at an auction of one-year Treasury bills.

Hungary needs a “quick” deal and is ready to discuss the conditions, Tamas Fellegi, the minister assigned to lead the aid talks, told reporters today. The cost of insuring Hungary’s debt through credit-default swaps earlier reached an all-time high and the forint touched a record low versus the euro after aid negotiations broke off because of new laws that threaten to undermine the independence of the central bank.

“The market had speculated on a failure of talks in recent days, the government therefore decided to intervene verbally,” Daniel Lenz, Frankfurt-based chief emerging-markets strategist at DZ Bank AG, wrote in an e-mailed response to questions from Bloomberg. “Actually the chance of the deal has been above 50 percent a week ago and still is. Nothing except for communication has changed.”

Hungary’s international aid talks won’t start until the government proves that the new law doesn’t infringe on the independence of the central bank, European Commission spokesman Olivier Bailly told reporters in Brussels today.

‘Fully Compatible’

The central bank law is “fully compatible” with EU regulations and the government will continue to respect the Magyar Nemzeti Bank’s independence, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi and published by the ministry today.

The forint appreciated 0.2 percent to 319.82 per euro after reaching a record low of 324.24 earlier today. Credit-default swaps climbed to 739 basis points, heading for the highest close on record, compared with 650 basis points on Jan. 3, data provider CMA said.

The government sold 35 billion forint ($140 million) of one-year bills today, 10 billion forint less than targeted, data from the Debt Management Agency, known as AKK, on Bloomberg show. The average yield rose to 9.96 percent, the highest since April 2009, from 7.91 percent at the last sale of the same- maturity debt on Dec. 22.

Today’s auction yield result was “poor” given the lack of sufficient demand even 3 percentage points above the central bank’s benchmark rate, Guillaume Salomon, a London-based strategist at Societe Generale SA, wrote by e-mail today.

Sell-Off

“As long as there is no EU/IMF aid in store, forint assets will continue to sell-off,” Salomon said.

Hungary, which became the first EU country to receive an IMF-led bailout in 2008, shunned fresh aid in 2010 when Viktor Orban took over as prime minister. Orban reversed his policy last year when the state started struggling to raise funds at debt auctions and the forint plummeted.

The EU’s most-indebted eastern member received its second sovereign-credit downgrade to junk last month when Standard & Poor’s followed Moody’s Investors Service in taking the country out of the investment-grade category on Dec. 21.

The rebound in the forint supported by “more conciliatory comments by the government on an IMF deal was met with the harsh reality of a poor bond auction,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman, and colleagues wrote in a research report today.

Stocks Fall

The benchmark BUX stock index fell 2.1 percent as OTP Bank Nyrt., the country’s largest lender, sank 2 percent and Mol Nyrt., the biggest refiner, declined 1.8 percent.

Hungary will have to make payments on its 20 billion-euro ($26 billion) 2008 bailout this year, with instalments of about 700 million euros due in February and then the same amount at quarterly intervals, plus 300 million euros in June and 500 million euros in each of September and December, according to researcher Capital Economics.

The country also has a 1 billion-euro bond maturing in November and a smaller yen note due in July, according to data on AKK’s website. Against that, the agency has deposits of 2.5 billion euros, according to Royal Bank of Scotland Group Plc.

--With assistance from Edith Balazs in Budapest and Agnes Lovasz in London. Editors: Stephen Kirkland, Peter Branton

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

To contact the editor responsible for this story: Andras Gergely at agergely@bloomberg.net


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