Bloomberg News

Hungary Most at Risk When Borrowing Costs Rise: Chart of the Day

February 13, 2012

Feb. 10 (Bloomberg) -- Hungary is the most vulnerable of the European Union’s eastern states to a sudden jump in borrowing costs, underscoring the need for a bailout accord and government action to restore investor confidence.

The CHART OF THE DAY compares countries’ projected average interest rate on state debt in 2012 with the so-called critical interest rate, the level that Erste Bank AG estimates would push the share of debt-servicing costs above an unsustainable 10 percent of tax revenue. Hungary has the smallest buffer in eastern Europe and is closest to that threshold after Greece, Portugal, Ireland and Italy, which already breach the limit.

Hungary’s financing risk is amplified after bailout talks with the International Monetary Fund over government policies broke down. The stalemate with the IMF caused the forint to drop to a record-low 320.46 against the euro on Jan. 4 and kept the central bank from cutting the EU’s highest benchmark rate to spur the economy. It closed at 291.23 to the euro yesterday.

“If Hungary fully devotes itself to a credible fiscal plan, that would substantially reduce the space for unpredictable ad-hoc policy decisions,” said Juraj Kotian, an economist at Erste Bank Group in Vienna. “Combined with a broader reform program, this would reduce the risk premium priced in bond yields and enable it to cut rates.”

The IMF and EU in December suspended talks on a second bailout in four years on concern that a new central bank law will limit the institution’s independence. Hungary may be unable to meet its debt payments this year if the euro crisis worsens and the economy slips into a recession, the IMF said on Jan. 25.

Prospects of a renewal in talks have helped the forint pare part of its losses to close at 291.23 per euro yesterday and pushed the five-year local-currency yield to about 8.25 percent, the lowest in more than two months. Hungary should avoid “any heavy” financing at a rate exceeding 6 percent to remain above the critical threshold, Kotian said.

--Editors: James M. Gomez, Hellmuth Tromm

-0- Feb/09/2012 23:00 GMT

To contact the reporter on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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