Hungarian Bonds Gain as Orban’s IMF Pledge Underpins Six-Week Bill Auction

Hungary’s bonds and stocks rallied after the government sold the planned amount of debt at an auction on optimism Prime Minister Viktor Orban will be able to restart talks on an international bailout.

The government sold 40 billion forint ($161 million) of six-week Treasury bills. The average yield was 7.77 percent, compared with 7.24 percent at the last sale of that maturity on Nov. 28 and the highest (HBTB6WYA) yield since June 2009, according to data from the Debt Management Agency. The government’s 10-year bonds rose, pushing yields to their lowest level this year, while the benchmark BUX stock index rallied the most in six weeks.

The forint fell to a record low against the euro last week after the International Monetary Fund and the European Union broke off talks on Hungary’s bid for a bailout as Orban refused to withdraw new central bank regulations the institutions objected to. Hungary is ready to accept “any kind” of credit line that strengthens the country’s market financing, Orban said in an interview with state news service MTI yesterday.

“The latest communication from the government’s officials towards an IMF deal has been more constructive,” Mai Doan, a London-based economist at Bank of America Corp., wrote in a research report today. “Concrete steps towards the IMF deal are required for a lasting recovery in Hungarian assets.”

The forint traded at 315.39 per euro at 5 p.m. in Budapest, compared with 314.35 on Jan. 6. The currency, the world’s worst performer against the euro in the past month with a 4.2 percent decline, reached a record-low 324.24 on Jan. 5. Investors bid for 148 billion forint in debt at the Treasury bill auction, the most (HBTB6WBR) for that maturity since April 2011.

Debt Downgrades

Fitch Ratings lowered Hungary’s credit score below investment grade on Jan. 6, following similar moves from Standard & Poor’s and Moody’s Investors Service last year, saying doubts remain as to whether the government will submit to conditions for aid.

“I expect protracted negotiations as the international organizations will ask for more than amending the central bank law,” Daniel Bebesy, who helps oversee $1.5 billion mostly in Hungarian government bonds at Budapest Fund Management, said by phone today.

Orban had shunned the IMF since taking office in 2010 to prevent interference in what he called his “unorthodox” measures. They included the effective nationalization of $13 billion of private pension-fund assets, extraordinary industry taxes to raise revenue for the budget, Europe’s highest bank levy and forcing lenders to swallow exchange-rate losses on foreign-currency mortgages.

‘Self-Induced Stress’

“It’s completely self-induced stress,” Lars Christensen, chief emerging-market analyst at Danske Bank A/S (DANSKE), said in a phone interview before Orban’s comments. “This government could end this stress tomorrow. Bond yields would be back at 6 percent in 24 hours if the Hungarian government enacted the right policies. They wouldn’t need the IMF.”

Bonds and the currency pared weekly losses after Orban eased his confrontation with central bank President Andras Simor on Jan. 6 and signaled a commitment to reviving bailout talks. It’s “only natural” the IMF will want to see an economic policy that “guarantees” the lender “will get its money back,” he said yesterday.

Hungary’s 10-year notes (GHGB10YR) climbed, cutting yields 23 basis points to 9.85 percent, the lowest close since Dec. 28, according to generic prices compiled by Bloomberg. The BUX index rose 3.5 percent, the most on a closing basis since Nov. 30, as OTP Bank Nyrt., Hungary’s largest lender, rallied 5 percent.

‘No Compromise’

Hungary’s budget deficit was 1.73 trillion forint in 2011, 252 percent of the government’s initial year-end target, after the government assumed debt from counties and the state railway company in December, the Economy Ministry said in an e-mailed statement today.

Hungary’s own resources to cover financing needs would run out by the end of the first half without IMF assistance or a successful foreign-currency debt offering, according to William Jackson, an emerging markets economist at London-based Capital Economics Ltd.

“Time is of the essence,” for Hungary to reach a financing agreement, IMF Managing Director Christine Lagarde said in a Jan. 6 interview with CNN. “We’re not complacent. We don’t compromise. But, equally, we never leave the table.”

Loan Repayments

The country will have to make payments of more than 4 billion euros ($5.1 billion) this year on its 20 billion-euro 2008 bailout. An installment of about 700 million euros is due in February and then the same amount at quarterly intervals, plus 300 million euros in June and 500 million euros in each of September and December, according to the IMF’s website.

The government also needs to refinance a 1 billion-euro bond maturing in November and a smaller yen note due in July, according to data on the website of the debt-management agency, known as AKK.

Against that, the agency has deposits of 2.5 billion euros at the central bank and would be able to raise money by selling nationalized private pension-fund assets. The state had 1 trillion forint remaining from the pension assets at the end of October, according to data on AKK’s website, including 192 billion forint in foreign-currency denominated securities.

The debt-management agency failed to raise the planned amount of debt at four auctions in the past month and scrapped one bond-exchange auction. The AKK is planning to sell 33 billion forint in 2014, 2017 and 2022 bonds at an auction on Jan. 12, according to data from the agency published today.

The cost of insuring against a default on Hungary’s government bonds with credit default swaps fell to 687 basis points, compared with 692 basis points on Jan. 6 and 735 basis points on Jan. 5, the highest close on record. A basis point is one hundredth of a percentage point.

“Hungary doesn’t need to go bankrupt if it gets help from the IMF and the EU,” Christian Schulz, an economist at Berenberg Bank in London, said in a telephone interview, adding that Orban “has a long, long way to go to do everything to comply with the demands of the creditors.”

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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