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Hungarian Government Says It Will Resume IMF Talks; Forint Erases Losses
Hungary’s cabinet said it will resume talks with the International Monetary Fund, helping the forint erase losses suffered because of rising investor concern about the economy’s resilience without external support.
“The negotiations will likely continue in the autumn and an agreement will be reached,” the Economy Ministry said in an e- mailed answer to questions from Bloomberg News. The ministry didn’t specify the probable contents of the agreement.
Officials from the IMF, the lead contributor to a $25 billion bailout to Hungary, left Budapest on July 17 without endorsing the cabinet’s budget plans. Hungary was the first European Union member to get a lifeline during the credit crisis in 2008.
The forint, which was the world’s worst-performing currency in the five days until the announcement, slid the most in a month after central bank President Andras Simor yesterday said he had no information of plans to resume the talks.
The currency weakened to as much as 286.23 per euro today before erasing its losses to trade at 282.88 at 6 p.m. in Budapest. It dropped 1.6 percent in the past five days. The yield demanded by investors at local government debt sales rose for the first time today since July 29.
‘Not a Collapse’
Talks with the IMF and the EU ended last month after Prime Minister Viktor Orban, who was elected on a pro-growth platform in April, refused to commit to the previous cabinet’s pledge to reduce the budget deficit below 3 percent of gross domestic product next year. Orban has cited the need to boost growth after the worst recession in 18 years in 2009 and as quarterly growth came to a halt in the April-June period this year.
“It wasn’t a collapse of negotiations, it was just the end of a round of talks,” the ministry said in its e-mail.
The cabinet has since said it can forego renewing the IMF- led bailout, which expires in October, citing the country’s ability to finance itself from the market. The government returned to market financing in April 2009.
Analysts from UniCredit, Citigroup Inc., and Morgan Stanley have said in the past month that Hungary would benefit from an IMF safety net in case global market conditions deteriorate, making it more difficult and expensive for the government to borrow from the market.
Debt Level
Hungary remains vulnerable to sell-off in the forint in case market sentiment sours because of Hungary’s high government debt level, cloudy fiscal outlook and without the backing of the IMF, said the analysts including Luis Costa at Citigroup in London.
The debt level was 82.9 percent of GDP as of the second quarter, central bank data show, the highest in the eastern part of the EU.
Hungarian credit-default swaps, which measure the cost of insuring government bonds against default, rose the most in the world since Orban assumed power on May 29, increasing 36 percent. The five-year euro CDS was 327.82 yesterday, compared with 316 before the collapse of IMF talks on July 17 and 367 on the first working day afterwards.
The central bank yesterday cited the country’s risk premium among the reasons for keeping the benchmark interest rate unchanged yesterday for a fourth month. The bank said the risk may warrant an increase in the key rate if it weakens the forint on a sustained basis.
“Although record low yields in the U.S., Japan and western Europe should support local currency emerging market bonds, we believe Hungary is a contrarian example due to mounting private and public debt and ongoing uncertainties related to fiscal policy and a lack of external assistance,” UniCredit Group strategists including Matteo Ferrazzi in Milan wrote in a note to clients. “We are therefore retaining our bearish positioning on both the forint and Hungarian government bonds.”
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net
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