Hungary, Poland Funding Defies Contagion Concern: Chart of the Day

Poland and Hungary are ahead of funding goals and Czech borrowing costs have dropped to a record low, indicating concerns that the European Union deficit crisis would spread to eastern Europe were overblown.

The CHART OF THE DAY shows Poland covered 70 percent of its 196.8 billion-zloty ($63 billion) gross borrowing need by July 30 and Hungary issued 51 percent of its 6.25 trillion-forint ($28.6 billion) target by June 30. While the Czech Republic has to sell 71 percent of its requirement in the second half, the yield on its benchmark 2019 bond fell to a record low last week.

“Reforms, EU and International Monetary Fund support and a better fiscal picture than in western Europe provide central Europe with a supportive backdrop to resist spillover from the eurozone periphery,” said Simon Quijano-Evans, head of emerging-market strategy at Credit Agricole Cheuvreux SA in Vienna. “Markets have learned that the situation in Hungary is nowhere near as serious as that of Greece.”

After Standard & Poor’s cut Greece’s credit rating to junk on April 27, contagion concern weakened Hungary’s forint and Poland’s zloty 6.7 percent versus the euro in the second quarter. The cost of credit-default swaps to protect investors against a Hungarian default doubled.

Investors continued to buy central European bonds, with demand outstripping supply by as much as three times at some auctions, as debt levels are likely to be lower than the euro- area average of 85 percent of economic output this year, with Hungary’s level at 79 percent, Poland’s at 54 and the Czech Republic’s at 40 percent, European Commission estimates show.

Domestic demand for government debt is partly assured by regulations that require pension funds to limit the portion of stock holdings to 40 percent in Poland and in Hungary, meaning bonds and cash account for at least 60 percent of their assets. As a result, local banks and funds hold 58 percent of sovereign debt in Poland, 74 percent in the Czech Republic and 54 percent in Hungary, against 29 percent for Greece, government data show.

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

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