Forint Hits Record Low as Default Swaps Soar on IMF Aid Concern

The forint dropped to a record low against the euro and credit default swaps reached an all-time high after Citigroup Inc. said an International Monetary Fund deal is unlikely in the next six months.

The forint fell to 321.1 against the European common currency at 5 p.m. in Budapest. The previous record was 317.92 on Nov. 14. The cost of insuring Hungarian bonds using credit- default swaps climbed to a record 708 basis points from 650 yesterday, data provider CMA said.

The European Union and the IMF broke off aid talks last month as the government prepared legislation that threatened to undermine the independence of the central bank. Parliament approved the laws on Dec. 30. The EU has no current plans to resume talks, European Commission spokesman Olivier Bailly said yesterday.

“We believe there is an increased likelihood that the IMF deal will not happen before the second half of 2012,” Eszter Gargyan, a Budapest-based economist at Citigroup, wrote in a research report today.

Hungary, the EU’s most-indebted eastern member, received its second sovereign-credit downgrade to junk last month when Standard & Poor’s followed Moody’s Investors Service in taking the country out of the investment-grade category on Dec. 21.

“The dispute with the EU may mean that the forint is left without any support for weeks,” Gergely Forian-Szabo, who helps manage $770 million at Budapest-based Pioneer Alapkezelo, the local fund management unit of UniCredit SpA, said in a telephone interview. “We are testing uncharted territory, the next level of resistance isn’t in sight.”

Rate Increases

Hungary needs a financing agreement with the IMF and EU to restore investor confidence and wants an agreement “as soon as possible,” Minister Tamas Fellegi, the country’s chief negotiator, told Figyelo weekly, according to excerpts from an interview to be published tomorrow, sent to Bloomberg News by the magazine.

A delay in the IMF talks may necessitate rate increases of as much as 300 basis points from the current 7 percent rate to defend the forint, Citigroup’s Gargyan said.

Forward-rate agreements used to bet on three-month interest costs in six months rose 52 basis points to 8.65 percent, the highest since June 2009. The Budapest Interbank Offered Rate, to which the FRA contracts settle, traded at 7.35 percent.

Bond Investors

“The market has priced in a 1 percentage point rate increase, which is not helping bond investors,” Karoly Bamli, a Budapest-based trader at Commerzbank AG, wrote in an e-mailed response to questions. Concern the IMF talks won’t be completed in the first half of the year hurt the forint, Bamli said.

Ten-year note yields (GHGB10YR) climbed 38 basis points to 10.75 percent, the highest since April 2009, extending the jump in the past three days to 85 basis points, according to generic prices compiled by Bloomberg. Hungary’s benchmark BUX stock index (BUX) fell 2.4 percent to the lowest since November as OTP Bank Nyrt. (OTP), the country’s biggest lender, plunged 6.9 percent.

Hungary won’t default and the country will continue to fully service its debt, Janos Lazar, head of the ruling Fidesz party’s parliamentary group, told news website fn24.hu.

Hungary’s state debt management agency rejected all bids at a government bond exchange auction today as the increase in yields rendered “an extension of the maturity not worthwhile,” the agency said in an e-mailed statement. The auction offered the chance for investors to swap government securities due in 2013 for 10-year notes.

The government yesterday raised 45 billion forint ($190 million) in an auction of three-month Treasury bills, at an average yield of 7.67 percent, the highest for three-month notes since August 2009.

“The market implications are obvious,” Charles Robertson, head of macro-strategy at Renaissance Capital in London, wrote in an e-mail today. “Within the central European three, favor Poland and Czech Republic over Hungary. Within emerging markets, favor anywhere over the central European three.”

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Zoltan Simon at zsimon@bloomberg.net

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