Hungarian bonds tumbled, pushing up borrowing costs by the most since October 2008, and the forint and stocks plunged after a government official said speculation of a default “isn’t an exaggeration.”
The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 149 basis points, or 1.49 percentage point, to 468, according to JPMorgan Chase & Co.’s EMBI Global Index. The BUX Index of equities tumbled as much as 8.4 percent, while the forint fell 1.7 percent to 286.74 per euro at 11:19 a.m. in New York, the weakest level since June 2009.
“When people close to the government start talking about a higher risk of default, what do they expect investors to do?” said Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London. “You simply cannot talk like this in these markets. Investors will take money off the table, they will not risk it.”
The comments today from Peter Szijjarto, spokesman for Prime Minister Viktor Orban, sparked concern that Europe’s debt crisis is spreading after credit downgrades of Greece, Portugal and Spain. The European Union pledged almost $1 trillion to the bloc’s weakest economies last month after Greece’s widening budget deficit threatened to undermine confidence in the euro.
“It’s clear that the economy is in a very grave situation,” Szijjarto said at a press conference in Budapest. “I don’t think it’s an exaggeration at all” to talk about a default, he said.
Hungary, the first EU nation to receive an international bailout during the credit crisis, has the equivalent of $26.9 billion of debt coming due this year, according to data compiled by Bloomberg. The government’s budget deficit could grow to as high as 7.5 percent of gross domestic product this year, compared with a 3.8 percent target set with the International Monetary Fund by the previous government, Mihaly Varga, Orban’s chief of staff, told M1 television on May 30.
Orban, who took office May 29, vows to end austerity and cut taxes to help accelerate economic growth after the worst recession in 18 years. Former Hungarian Finance Minister Peter Oszko said today the country is “in no way near default.”
“Politics is clearly playing a role here,” Win Thin, a senior currency strategist at Brown Brothers Harriman & Co., said today in a report. “We do not think Hungary can stand without IMF oversight at this point, especially with markets so wary of debt-laden European nations.”
Hungary, which received a 20 billion-euro ($24 billion) loan from the IMF, the EU and the World Bank in October 2008 to help avert a default, hasn’t drawn any funds from its standby program under the fourth and fifth previews, and the new government has raised the possibility of renegotiating this year’s deficit target to 5 to 6 percent of GDP, according to Thin.
“The new government is trying to say the picture is much uglier and we’re going to work to clean the house,” said Luis Costa, an emerging market strategist at Citigroup Inc. in London. The comments “are probably more populist than anything else,” he said. “When it comes to the funding requirements, the situation in 2010 is still very manageable.”
Credit-default swaps on Hungarian government bonds rose to 371 basis points from yesterday’s close of 308, according to CMA DataVision prices. An increase signals deterioration in investor perceptions of credit quality.
“Liquidity has disappeared, interbank-market making ceased and there’s a total selloff,” said David Palmai Pallag, a bond trader at Raiffeisen Bank in Budapest. “The situation is starting to resemble the one we saw in 2008 just before the market came to a complete halt.”
BUX Bear Market
The BUX index briefly dropped more than 20 percent from this year’s high before paring losses. The gauge fell 3.3 percent to 21,288.93 at the close of trading in Budapest.
The MSCI Emerging Markets Index of shares lost 1.2 percent today, while currencies from Poland to Romania and Russia weakened against the dollar. The Standard & Poor’s 500 Index tumbled 2 percent as a report showing slower-than-estimated American job growth worsened losses sparked by concern over Hungary’s debt.
Hungary is in its fifth year of cost cutting and the government reduced the deficit to 4 percent of GDP last year from 9.3 percent in 2006, the EU’s widest at the time.
The country’s debt level may reach 79 percent of GDP this year, on par with Germany and making it the most indebted eastern EU member, according to the European Commission. The debt level is less than the 125 percent of GDP for Greece, 118 percent for Italy, and 86 percent for Portugal.
Orban, who won elections by pledging to cut taxes and stimulate the economy, failed yesterday to get EU approval for looser fiscal policy.
A fact-finding panel will probably present preliminary figures on the state of the economy this weekend, Szijjarto said. The government will publish an action plan within 72 hours after the committee reports its findings, he said.
“The moment of truth has already arrived in Greece and it has yet to come to Hungary,” Szijjarto said. “The government is prepared to avoid the road that Greece has been down; in other words, we won’t hesitate to act after the truth becomes known.”
Szijjarto’s comments “are extremely confusing and more market panic should be expected,” Elisabeth Andreew, chief foreign-currency strategist at Nordea Markets in Copenhagen, wrote in an e-mailed comment. “Beware of more spill-over effects on other currencies and asset classes.”