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Forint, Bonds Advance as Hungary Exceeds Funding Target in Debt Auction
Hungary sold almost double the amount of bonds it planned to issue today, a day after the Economy Ministry made a U-turn by pledging to keep the budget deficit below 3 percent of economic output. Sovereign debt rose the most in three weeks and the forint strengthened.
The government sold 95.3 billion forint ($425 million) of bonds maturing in 2014, 2016 and 2020 at an auction and an extra, non-competitive sale, compared with the 50 billion forint planned, the Debt Management Agency said on its website. In the secondary market, the yield on the country’s three-year bonds dropped 14 basis points to 6.94 percent at 5:53 p.m. in Budapest. The forint strengthened 0.7 percent to 284.78 per euro, erasing a decline before the debt auction results.
Hungary is committed to reducing its budget deficit to below 3 percent of gross domestic product next year, Economy Minister Gyorgy Matolcsy said yesterday, an indication that the country may be giving in on a three-month battle with the European Union and International Monetary Fund to widen its budget-deficit target. Talks between Hungary and the EU and IMF, which funded a rescue loan for the country in 2008, broke down in July after the cabinet refused to commit to next year’s 2.8 percent shortfall target.
“The Economy Minister’s comments yesterday returned confidence into Hungarian assets,” said Krisztian Toth, a bond trader at BNP Paribas SA in Budapest. “This was a very strong auction.”
Bids
The government sold 41 billion forint of bonds due in 2014 at an average yield of 7.18 percent, compared with 6.88 percent on Aug. 26, according to the Debt Management Agency’s website. It also sold 27.1 billion forint of 2016 notes at an average yield of 7.21 percent versus 7 percent and 27.2 billion forint of the 2020 maturity at 7.35 percent, compared with 7.05 percent.
Bids in the first sale totaled 194.4 billion forint versus 88.7 billion forint at the previous sale on Aug. 26, according to Debt Management Agency’s page on Bloomberg. Only bidders for the first auction were allotted bonds in the extra sale.
The budget pledge will guarantee that Hungary can finance its deficit on the market through 2011, Matolcsy said. That will eliminate the need for a new loan from the IMF or EU after the current bailout expires in October, he said.
‘Premature’
The government has spooked investors with statements since Prime Minister Viktor Orban came to power in May. First, his party said the 2010 deficit might be almost double the 3.8 percent of gross domestic product targeted for this year. The forint plunged in June after a ruling party official said Hungary had a “slim chance” of avoiding a Greece-like fiscal crisis. The cabinet is committed to the 3.8 percent goal for this year, Matolcsy said.
“It is premature to turn bullish on local debt at this juncture,” Esther Law, an emerging-market debt strategist at Societe Generale SA in London, said before the auction results were announced. “We need to see more concrete measures on how this budget deficit reduction can be achieved and ideally the formal resumption” of IMF and EU negotiations, she said.
Matolcsy said the government needs 200 billion forint ($887 million) from a special tax on financial institutions this year and next to meet its targets. It also has to cut spending by as much as 200 billion forint in 2011 and the economy must grow by at least 2.5 percent after shrinking 6.3 percent in 2010.
‘Virtuous Circle’
Hungary could generate a “virtuous circle” for local assets if it sticks to fiscal discipline and mends relations with the central bank, Barclays Capital wrote in a note yesterday. Orban has urged Central Bank President Andras Simor to quit. A public sector pay cap cut Simor’s salary by 75 percent, drawing objections from the European Union and the European Central Bank on the grounds the law violates the bank’s independence.
“The new tones are positive and a step in the right direction but there is still a long way before the recent high risk associated with Hungarian assets has abated again,” Jyske Bank A/S, Denmark’s second-largest bank, wrote in a research report today. “This will require more specific initiatives.”
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