Prime Minister Viktor Orban is trying to lure Hungarians back to the bond market with the highest yields in three years as he seeks to finance the most indebted eastern nation in the European Union.
The government is offering bonds to individuals at yields as high as 5 percentage points above annual inflation, the best real return on the retail securities since 2009, said Laszlo Andras Borbely, deputy chief executive of Hungary’s Debt Management Agency. Hungarians cut their share of state debt to 3.5 percent at the end of 2011 from 10.1 percent in 2004 as the country suffered its worst recession since the end of communism and the state seized $12 billion from workers’ pensions.
The first EU country to be rescued by the International Monetary Fund at the start of the global credit crisis in 2008 is saddled with $87 billion of debt at a time when yields on Hungary’s 10-year bonds have climbed to the highest in the region after Greece and Portugal. The debt agency plans to sell one-year bills to individuals next week with a yield of 7.91 percent, topping the 7.58 percent on equivalent notes sold to institutions at an auction yesterday.
“It’s an important additional market,” Borbely said in a May 15 phone interview. “The domestic population tends to buy exactly when there is turbulence on wholesale markets.”
The government has set aside $8.2 million to advertise the offer and open offices to sell the bonds, according to a decree signed by Orban in April. The debt agency, known as AKK, hired Oscar-nominated cinematographer Lajos Koltai to direct TV commercials urging “unity for the cause.”
While government bonds held by households rose to 801 billion forint ($3.3 billion) as of April from 746 billion forint at the end of 2011, it may take years to boost household ownership to 10 percent again, Borbely said.
Orban threatened to deny pension payments to 3 million Hungarians if they didn’t turn over their privately managed pension assets to the state in 2010. The forint plunged 12 percent against the euro the following year as the government forced lenders to take losses on foreign-currency loans and levied special taxes on banks, energy, retail and telecommunications companies.
The forint has rebounded 4.9 percent this year after hitting a record low as Orban sought a new credit line from the IMF and the government approved measures to keep the budget deficit within the EU limit of 3 percent of gross domestic product on May 9. Hungary’s currency appreciated 0.1 percent to 300.4 per euro by 4:49 p.m. in Budapest.
The yield on five-year bonds in forint traded at 8.51 percent, compared with a 2 1/2-year high of 10.8 percent on Jan. 4, generic prices compiled by Bloomberg show. The extra yield over German bunds has climbed to 806 basis points from 405 basis points a year ago.
The yield premium spurred foreign investors to increase their holdings of the government’s debt to a record 4.319 trillion forint yesterday, compared with 3.366 trillion forint a year ago, according to data from the AKK.
The bond advertising campaign will help “counter the earlier measures which eroded trust,” said Adam Keszeg, a Budapest-based analyst at Raiffeisen Bank International AG (RBI), the biggest primary dealer in Hungarian bonds. “The takeover of the private pension funds didn’t serve to strengthen the propensity to save,” Keszeg said last month.
Hungarians who bought bonds maturing in March 2017 will receive an interest payment of 9.5 percent based on the premium over an initial inflation rate of 5.5 percent in January. While the premium will remain unchanged, the inflation measure is reset annually to the rate in January.
The central bank forecasts inflation slowing to an average 3 percent next year from 5.7 percent in April, meaning the AKK’s borrowing costs will fall, Borbely said. The yields on household Treasury bills will remain above securities for institutions to compete with bank deposit rates, Borbely said. Lenders are offering as much as 8.5 percent interest on six-month deposits.
Hungary probably won’t “substantially” increase the share of households owning government debt, said Viktor Szabo, who helps oversee $8 billion in emerging-market debt at Aberdeeen Asset Management (ADN) in London.
“Knowing the wealth and income situation of Hungarian households and their risk preferences, this can only be a marginal source,” Szabo wrote in e-mailed comments on May 5.
Annual salaries in Hungary were 8.8 percent lower than in neighboring Slovakia and 77 percent lower than Germany during 2010, according to data from the European statistics office. The average monthly gross wage rose 2.7 percent in March from a year earlier to 222,741 forint, the statistics office in Budapest said in a statement on May 18.
‘Trust the State’
Hungary’s GDP fell 1.3 percent in the first quarter of 2012 from the last three months of 2011, the Budapest-based statistics office said May 15 in a preliminary report.
“Boosting households’ debt holdings would require either a substantial increase in real wages, which is tough amid zero GDP growth, or it would require redirecting savings, but from where?” Szabo said.
For Laszlo Deak, a 67-year-old pensioner who grew up under communism, the state remains the most trusted destination for investments.
“My relatives and I all keep the small sums saved up for funerals or hospital emergencies at the Treasury,” Deak said, as he entered the Budapest building where government bonds are sold. “It is perfectly safe, I trust the state,” he said, adding that he trusted private investment providers less.
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