Hungarian Debt Risk May Increase on Deficit, DZ Bank Says
The cost of protecting bondholders against a Hungarian government default may rise after the Economy Ministry said the budget deficit would widen this year without the one-time revenue from private pension funds, according to DZ Bank AG.
The 2011 budget gap would reach 7 percent of gross domestic product if not for the government’s move to force pension savings from private funds into state coffers, the Economy Ministry said on May 18 in e-mailed comments to Bloomberg News. That would be the widest since 2006, when the deficit was 9.3 percent. Pension-fund revenue will swing the budget into a surplus of 2 percent this year, the ministry said.
“News on a large underlying budget deficit for 2011 -- 7 percent of GDP without one-off revenues, according to the Economy Ministry - once again raised concerns about the conduct of fiscal policies,” Zoltan Adam, an analyst at DZ Bank’s unit in Budapest, wrote in a research report today. “Hungarian spreads may therefore face some widening ahead of the weekend.”
Hungary’s credit-default swaps were little changed at 251 basis points today, according to data compiled by CMA in London. The perceived risk has dropped, with Hungarian CDS having fallen 160 basis points from 410 on Jan. 10, after Prime Minister Viktor Orban said he would cut welfare payments and drug subsidies to tackle the biggest debt burden among the European Union’s eastern members.
Forint-denominated bonds have returned as much as 23 percent this year for the biggest gains worldwide.
“We continue to favor Hungarian debt, but would be more cautious at this stage of the rally,” Dmitry Gourov, a strategist at UniCredit SpA in Vienna, wrote in an e-mail to clients today.
The forint weakened 0.6 percent to 268.65 per euro by 4:39 p.m. in Budapest, leaving it little changed in the week. Today’s depreciation offset a 0.6 percent rally yesterday, which was supported by a jump in demand at an auction of government bonds, according to analysts at BNP Paribas SA and Commerzbank AG.
The government sold 67.5 billion forint ($363 million) of bonds at the auction, compared with the planned 45 billion forint, according to results published by the Debt Management Agency on Bloomberg. Investors bid to buy 224 billion forint of debt, compared with 158 billion forint at the last sale.
“The very strong demand is a sign of ongoing investor confidence in the government’s fiscal plan and ample liquidity seeking higher-yielding assets,” analysts at Erste Group Bank AG in Budapest including Zoltan Arokszallasi wrote in a note today.
The forint has gained 3.7 percent against the euro this year, the second-biggest advance among more than 20 emerging market currencies tracked by Bloomberg after the Romanian leu.
Morgan Stanley is “unwilling to reverse” its bullish call on Hungary “entirely” until it sees more evidence that the government is struggling to implement its fiscal plans, analyst Pasquale Diana wrote in an e-mailed research report yesterday. The investment bank sees “forint strength” in the medium term and keeps Hungarian credit at “overweight” rating in its model portfolio, Diana wrote.
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