Bloomberg News

Orban Taxing Central Bank Lifts Yields Before Bond Auction

July 12, 2012

Hungarian bond yields are climbing from eight-month lows before an auction today on concern that plans to tax the central bank undermine its independence and threaten International Monetary Fund bailout talks.

The government is offering 44 billion forint ($188 million) of bonds maturing in 2015, 2017 and 2022, according to data from the Debt Management Agency on Bloomberg. The yield on the existing notes due 2017 rose to 7.85 percent yesterday from 7.69 percent on June 29, the lowest since October. The premium over benchmark German bunds widened yesterday to 760 basis points, or 7.6 percentage points, from 714 on June 29 and 509 a year ago, generic data compiled by Bloomberg show.

Lawmakers led by Prime Minister Viktor Orban’s Fidesz party approved on July 9 levying a tax on financial transactions that would also apply to the central bank and the state Treasury to help compensate for a reduction in payroll taxes. Magyar Nemzeti Bank President Andras Simor told reporters in Budapest on July 2 that the move would violate central bank independence by limiting the use of its assets and is illegal. Hungary won’t alter the levy even at the European Central Bank’s request and will only accept IMF conditions for aid that serve the national interest, Orban said in a HirTV interview on July 10.

The IMF and European Union probably “will have troubles with the financial transaction tax, causing further delays to backstop negotiations only a week after the central bank independence issues have been resolved,” Peter Attard Montalto, a London-based analyst at Nomura International Plc, wrote in a July 10 research report.

Sell Off

Orban’s cabinet requested aid from the IMF and the EU in November after the forint weakened to a record low against the euro and government yields jumped to the highest in more than two years.

The international lenders refused to start negotiations on concern a law passed in December that allowed the government to nominate policymakers without consulting the central bank threatened its independence. The EU agreed to begin talks last week after Parliament amended the legislation.

Hungarian assets will face a “sell off into September” as investors realize how long it will take to reach a deal, Montalto said in e-mailed comments yesterday.

The forint, which rallied 10 percent against the euro in the first half of this year, is the third-worst performer worldwide so far this month after Romania’s leu and the Sudanese pound, dropping 1 percent in July to 288.9 per euro by 9:26 a.m. in Budapest. The five-year bond yield rose three basis points to 7.877 percent today.

Tough Talk

“Once market conditions have improved and the forint is off the dips, the government is not shy starting new conflicts,” Daniel Lenz, a Frankfurt-based emerging-market strategist at DZ Bank AG, wrote in e-mailed comments yesterday.

The first round of aid negotiations between the EU, its most-indebted eastern member and the IMF will take place between July 17 and 25, Mihaly Varga, the minister in charge of the talks, said in a televised interview on July 9, adding that the negotiations will be “tough.”

“I doubt that the government really takes a U-turn on its whole strategy” of acquiring aid, Lenz said. “It still seeks an IMF loan, given that the euro-zone crisis and stressed market conditions could prevail for a long time.”

Hungary sold five-year debt at an average yield of 7.84 percent, the lowest cost in almost two months, at the last biweekly auction on June 28 after the IMF acknowledged the government’s progress toward starting bailout negotiations. The auction yield rose as high as 9.63 percent at the end of 2011.

The Economy Ministry didn’t immediately respond to an e- mail seeking comment on how the transaction tax will affect IMF talks and Hungary’s market perception.

Irritating IMF

Credit-default swaps on Hungary’s debt rose two basis points to 511 basis points today, within 20 basis points of the lowest level since October, reached on July 3, according to data compiled by Bloomberg. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.

Hungary will probably reject any request from international lenders to introduce taxes on real estate or other personal assets, Varga said in the televised interview, adding that the transaction levy on the central bank doesn’t limit its monetary policy independence.

“The financial transaction tax may irritate the IMF as it is a symptom of the wider issues of distortive, unorthodox fiscal policy,” Nomura’s Montalto said.

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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