Bloomberg News

Hungary Pledges IMF Compromise to Quicken Talks After Bond Rout

January 11, 2012

Jan. 6 (Bloomberg) -- Hungary pledged to discuss conditions for an International Monetary Fund loan as the government seeks to accelerate the talks after the forint fell to a record and a government debt sale fell short of the target.

The Cabinet is ready to start negotiations on a standby loan agreement with the IMF and the European Union and wants a deal “quickly,” Tamas Fellegi, Hungary’s chief negotiator, told reporters in Budapest yesterday. The government seeks a precautionary loan to tap only if market conditions require it.

Talks for Hungary’s second bailout in four years broke down last month as Prime Minister Viktor Orban, who shunned the IMF since taking office in 2010, refused to abandon a central bank law that the EU said threatens the monetary authority’s independence. The Cabinet must prove that’s not the case before talks can restart, the European Commission said yesterday.

“The government is showing some signs of flexibility and this is increasing the chance for a deal,” Murat Toprak, a London-based strategist at HSBC Holdings Plc in London, said in a phone interview. This “was not a full U-turn on the policy of defying the IMF and EU but a turn in the right direction.”

The forint strengthened against the euro after Fellegi’s comments and traded at 318.74 at 10:48 p.m. in Budapest after falling to a record low 324.24. The yield on the benchmark 10- year government bond declined to 10.4 percent, after rising to as high as 11.34 percent, according to generic prices compiled by Bloomberg.

The cost of insuring Hungarian bonds using credit-default swaps climbed to 734 basis points from 650 basis points on Jan. 3, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers. The benchmark BUX stock index dropped 2.1 percent to 16,225.09.

Debt Sale

The government sold 35 billion forint ($140 million) in one-year bills yesterday, 10 billion forint less than the planned amount. 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.

Standard & Poor’s followed Moody’s Investors Service on Dec. 21 in cutting Hungary’s debt to junk, 15 years after the former communist country was awarded an investment-grade rating.

Orban swept to power in 2010, grabbing a two-thirds majority in parliament that allows him to unilaterally change the constitution.

‘Without Conditions’

He shunned IMF aid to protect what he called “unorthodox” measures from oversight. The steps included the effective nationalization of $13 billion of private pension-fund assets and extraordinary industry taxes to control the budget. There was a deficit of 182 percent of the Cabinet’s full-year target at the end of November.

Hungary is ready to negotiate with the IMF and the EU “without conditions” and to “discuss everything at the negotiating table,” Fellegi said, adding that this “doesn’t mean we’re ready to accept everything.’

‘‘The government is completely aware of the stakes of financial talks with the IMF and the European Commission,” Fellegi said yesterday. “We want a quick agreement.”

After a stint as premier in 1998-2002, Orban rode a wave of discontent with a government that failed to meet EU budget targets after joining the bloc in 2004 even with austerity measures starting two years later.

The previous Socialist administration also angered Hungarians when it admitted to lying about the state of the economy to win the 2006 election, sparking demonstrations that included clashes between protesters and police in the country’s worst street violence in 50 years.

Orban’s Power

Orban’s government has been reducing the power of independent institutions and asserting its influence since winning elections, bucking objections from the EU, the IMF, the U.S. and the United Nations.

Ruling-party lawmakers ousted the chief justice of the Supreme Court, narrowed the jurisdiction of the Constitutional Court, wrote a new constitution, replaced an independent Fiscal Council with one dominated by the premier’s allies, created a media regulator led by ruling-party appointees and chose a party member to lead the State Audit Office.

Restarting aid talks hinges on the central bank law, not on Hungary changing other laws that have been criticized for breaching EU norms, Olivier Bailly, a spokesman for the commission, said in Brussels yesterday. The question of financial aid “is limited for the time being to the independence of the national central bank,” he said.

‘Fully Compatible’

The central bank law, which came into effect on Jan. 1, is “fully compatible” with EU rules, Economy Minister Gyorgy Matolcsy said in a letter sent to European Central Bank President Mario Draghi yesterday. The Cabinet will continue to respect the Magyar Nemzeti Bank’s independence, Matolcsy wrote.

While the start of talks with the IMF may bolster the forint, the move may “well be misplaced and reversed once the government’s feet dragging then restarts,” Peter Attard Montalto, a London-based economist at Nomura International Plc., said in a report yesterday.

“We are still at first base,” Montalto said. “Investors are still underestimating the time it will take and the distance Orban will have to move on the policy front.”

Hungary defaulting remains a “real possibility” as Orban may balk at unwinding some of his economic policies in exchange for a bailout, according to Christian Schultz, a London-based economist at Berenberg Bank. It would take “a lot of short- sightedness” from Orban to let Hungary’s economy fail, he said.

“If Hungary does agree a program with the” EU and the IMF, “it would not need to default,” Schultz said. “However, the conditions attached may not be politically palatable for Orban, making bankruptcy a real possibility.”

Still, the government is “showing signs of back- pedaling,” Luis Costa, a London-based strategist at Citigroup Inc., said in an e-mail today, recommending to close a bet on the weakening of the forint.

“The end game here is a loan agreement sooner or later, as Hungary is very likely to experience difficulty in accessing capital markets at the current CDS levels,” Costa said.

--Editors: Balazs Penz, Jeffrey Donovan

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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