Bloomberg News

Hungary Borrowing Costs Jump to 2009 High; Bond Risk at Record

January 06, 2012

Jan. 3 (Bloomberg) -- Hungary sold three-month Treasury bills at the highest yield since 2009 at its first debt auction after passing laws that diminished the country’s chance of obtaining international financial aid. The cost of contracts to protect the nation’s debt climbed to a record.

The government raised 45 billion forint ($190 million), the full amount planned, according to data from the Debt Management Agency published on Bloomberg. The average yield increased to 7.67 percent, the highest for three-month notes since August 2009, climbing from 7.43 percent at the last sale a week ago.

“The country’s financing will be impossible over the longer term at such high yields,” Balint Torok, an analyst at Buda-Cash Brokerhaz Zrt., said in a telephone interview. “Investor confidence in Hungary is deteriorating further as the government isn’t showing enough commitment to reaching a deal with the IMF and EU.”

The cost of insuring Hungarian bonds using credit-default swaps climbed to 651 basis points from 635 basis points on Dec. 30, data provider CMA said.

Declines in 10-year forint-denominated bonds lifted yields 27 basis points to 10.36 percent, the highest since June 2009, according to generic prices compiled by Bloomberg at 5 p.m. in Budapest. The spread over similar-maturity Polish debt rose to 447 basis points, the biggest gap since April 2009.

‘Erratic Communication’

“There is only one reason for the escalation in the sell- off in the Hungarian markets and that is the increasingly erratic communication from the Hungarian government,” Lars Christensen, a Copenhagen-based economist at Danske Bank A/S, wrote in a research report today.

Lawmakers approved regulations on Dec. 30 that stripped central bank President Andras Simor of his right to name deputies, expanded the rate-setting Monetary Council and created a position for a third vice president. Work on the legislation prompted the International Monetary Fund and the European Union to break off talks last month, with no plans to return yet. The forint slid 0.6 percent to 315.8 per euro.

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

Protests

Opposition groups campaigned yesterday against the country’s new constitution, which came into effect on Jan. 1, the first joint protest since Prime Minister Viktor Orban came to power in May 2010.

“The near-term outlook for Hungarian assets clearly looks negative,” Gyula Toth, a Vienna-based strategist at UniCredit SpA, wrote in a research report.

European Commission representatives have no current plans to return to Budapest to negotiate a financial aid package, due partly to the central bank law, commission spokesman Olivier Bailly told reporters in Brussels today.

Hungary’s public debt rose to 82.6 percent of gross domestic product at the end of the third quarter from 76.8 percent in the second quarter, the central bank said yesterday.

Investors should sell the forint against the Turkish lira, Guillaume Salomon, a London-based strategist at Societe Generale SA, wrote in an e-mail to clients today, citing the central bank law which “sets Hungary on a collision course” with the EU and the IMF.

The government aims to complete as much of its 4 billion- euro ($5.2 billion) foreign-currency debt issuance plan for 2012 as possible in the first half of the year, Laszlo Andras Borbely, deputy chief executive officer of the State Debt Management Agency, told reporters on Dec. 22. The state probably won’t issue Eurobonds before completing IMF aid talks, he said.

“Hungary is under growing pressure and all elements of an explosive mix are present,” Gabor Ambrus, head of emerging markets at 4Cast Ltd. in Sofia, Bulgaria, wrote by e-mail today. “Hungary’s downhill slide could sharply accelerate from here.”

--Editors: Ash Kumar, Stephen Kirkland

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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