Hungary's `Foot-in-Mouth Disease' Threatens Investor Confidence, Financing
Hungarian Economy Minister Gyorgy Matolcsy says the International Monetary Fund’s decision to suspend talks with the government doesn’t threaten fiscal stability. Investors say he’s wrong.
Six weeks after Hungary’s new ruling party roiled global markets by comparing the country with Greece, investors received another shock on July 17, when the IMF and EU walked away from negotiations without an agreement on plans to control the country’s budget deficit.
IMF backing increased confidence and helped Hungary finance its debt on capital markets. Without that support, investors will demand higher yields, boosting the cost of bond sales, said Daniel Bebesy, who helps manage $1.5 billion in Hungarian public debt at Budapest Investment Management. Hungary sold 35 billion forint ($156 million) of three-month Treasury bills today, 22 percent less than planned, as yields rose from a week earlier.
“Hungary needs the safety net that an IMF program provides,” Bebesy said yesterday in a phone interview. “Without this net, we could get a much bigger slap in the face if global developments turn negative.”
The forint, the world’s worst-performing currency against the euro in the past three months, fell 2.9 percent yesterday, dipping to the lowest since April 29, 2009. The yield on the benchmark three-year bond surged to 7.28 percent from 6.9 percent, and the cost of protecting the country’s debt against nonpayment for five years climbed 46 basis points to 362.5 basis points, the most since the Greece comments.
The forint rose 0.1 percent to 289.40 per euro as of 2:41 p.m. in Budapest. The three-year bond was little changed at 7.28 percent.
The IMF suspended its review of Hungary’s 20 billion-euro ($25.8 billion) emergency bailout because “a range of issues remain open,” the Washington-based lender said in a July 17 statement. The government must make “tough decisions, notably on spending,” to comply with deficit requirements, the EU said.
“This is just another incident of foot in mouth disease from the new government,” said Kieran Curtis, who helps manage about $2 billion in bonds, including Hungarian government debt, at Aviva Investors in London. Without the IMF, “there may or may not be enough appetite to buy Hungarian assets to make up for the lack of funding.”
The government will eventually agree to the IMF’s terms, because it can’t afford the backlash from voters affected by rising payments on foreign-currency loans, Curtis said.
The IMF delegation is expected to return to Budapest in September, and Hungary will eventually reach an agreement with the IMF, Economy Minister Gyorgy Matolcsy said yesterday at a news conference in Vienna.
‘Their Own Masters’
The government, which has pledged to stick to the IMF- approved budget-deficit goal of 3.8 percent of GDP this year, refused to implement further austerity measures and pushed creditors to widen next year’s target, Matolcsy said. Hungary also seeks a new “precautionary” loan from the IMF after the current credit line runs out in October.
“Markets have their own masters,” Prime Minister Viktor Orban said today at a news conference in Budapest. “Hungary will fulfill its international commitments and that will make it the fifth or sixth best-performing country among the 27 EU- member states. This is what I can say for the benefit of the markets. They should use it as they may.”
Hungary Debt Sales
Hungary turned to international lenders in 2008 to avert a default after demand for its debt dried up. At the time, the government suspended bond auctions, relying solely on its IMF credit line to repay debt and finance the budget.
Regular debt sales resumed in April 2009, and Hungary has since sold foreign-currency bonds twice. The debt management agency has missed its sales target at four forint-denominated auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.”
The average yield on the Treasury bills sold today rose to 5.47 percent from 5.28 percent at the previous auction on July 13, according to results posted by the Debt Management Agency.
Hungary’s debt management agency sees “no financing problems whatsoever” after today’s auction, Deputy Director Andras Borbely said in a phone interview. Hungary is 100 billion forint ($443 million) over its year-to-date debt sale plan as a 115 billion-forint excess in bond sales outweighs a 15 billion- forint shortfall in Treasury bills, he said.
Without an IMF program to reassure investors that there is a backstop in case of financing difficulties, buyers will demand higher yields to hold the country’s debt, said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, in an interview.
“Could they do it at anything else than a Greek interest rate?’ It’s questionable,” Kirkegaard said. “It’s not something they could afford to try because if that fails, they would be forced to go back to the EU and the IMF, and they would be met with austerity demands and structural reform demands that would be even harsher than now.”
Hungary’s central bank yesterday kept interest rates unchanged at a record-low 5.25 percent for the third month. Policy makers may need to raise borrowing costs in case of a “sustained increase in risk premiums,” the bank said.
The collapse of negotiations “doesn’t help Hungary’s risk assessment” and may lead to heightened currency volatility, central bank President Andras Simor told reporters after the rate decision.
“At best, Hungarian financial markets look set for an extremely bumpy ride over the coming weeks and months,” David Oxley, a London-based emerging-market economist at Capital Economics, said in an e-mailed note. “At worst, Hungary could be muddling into a future fiscal crisis.”
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