The forint rallied and Hungarian stocks rose to the highest in four months on speculation the government will accept conditions imposed by the European Union and International Monetary Fund for a bailout.
Hungary’s currency appreciated as much as 1.5 percent and traded 1.1 percent higher at 305.9 per euro by 5:13 p.m. in Budapest, the strongest on a closing basis since Dec. 21 and compares with a record low of 324.24 reached on Jan. 5. The benchmark BUX index rose 3.1 percent to the highest level since Sep. 8. Mol Nyrt., Hungary’s largest refiner, gained 4.2 percent and OTP Bank Nyrt. (OTP), the biggest lender, advanced 2.5 percent.
The EU yesterday threatened a lawsuit against Hungary for encroaching on the central bank’s independence, pressing Prime Minister Viktor Orban to resolve a dispute that halted talks on international aid for the country. The disagreements can be solved in an “easy, simple and quick” way, Orban told European lawmakers today in Strasbourg, France.
“The rally is because we’ve seen signs of a softening up from Orban on the central bank issue,” John Hardy, London-based head of foreign-exchange strategy at Saxo Bank A/S, said in an interview in Budapest today, adding that investors were looking for “concrete” steps from Orban on the issue.
Orban is willing to cooperate to resolve the conflict over the central-bank law, European Commission President Jose Barroso said today, citing a letter from Orban. Orban confirmed he sent a letter to Barroso, adding that he expected “swift” results from a meeting between the two next week.
‘Bow to Power’
The cost of insuring against a default on Hungary’s bonds with credit-default swaps fell to 670 basis points from 693 basis points yesterday. The government’s benchmark 10-year bonds rallied for the first time in four days, sending the yield 20 basis points, or 0.20 percentage point, lower to 9.582 percent.
Most European stocks rose today as the International Monetary Fund said it wants to raise as much as $500 billion to expand its lending resources.
Hungary is ready to comply with EU demands over the central bank, Bild reported earlier, citing an interview with Orban.
“We will bow to power, not to the arguments,” Orban told Bild in the interview.
The EU commission’s concerns about Hungary’s central-bank independence stem partly from the country’s Magyar Nemzeti Bank law, which includes provisions that allow ministerial participation in meetings of the monetary council, requires agendas to be sent to the government in advance and obliges council members to take an oath of fidelity to the nation. The commission also expressed doubts about Hungary’s rules for dismissing the president of the central bank and monetary council members.
Hungary risks a “run” on the forint unless the government obtains an international bailout, said Bernd Berg, a currency strategist at Credit Suisse in Zurich.
“Based on the weak fundamentals and unpredictable policies, our base case is that the forint will fall further,” Berg said in an e-mailed response to questions from Bloomberg. “We would not rule out a run on the currency with very negative implications on households and corporations. Only a deal with the IMF/EU will avoid a run, further devaluation of the currency in our view.”
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 accept exchange-rate losses on foreign-currency mortgages.
“There is pressure on all fronts on this government not to persist with these reforms,” Saxo Bank’s Hardy said.
The EU also threatened legal action yesterday against measures that may curb the independence of Hungary’s judiciary and data-protection authority.
The forint may weaken to a record low against the euro, Societe Generale SA said this week, citing the risk that Hungary will drop its pursuit of the aid deal.
“The process is simple: either the prime minister accepts that changes are required and the market can breathe a sigh of relief, or the premier tries to negotiate,” Benoit Anne and Guillaume Salomon, London-based emerging-market strategists at Societe Generale SA, wrote in a research report today. “The latter would be very bad news.”
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