Forint Slumps Most This Year as Bonds Drop, Default Swaps Surge

Hungary’s forint weakened the most in almost six months, government bonds tumbled and credit-default swaps jumped to the highest since January on concern bailout talks will be further delayed.

The forint declined as much as 2.2 percent, the most since Dec. 8, and traded down 2 percent to 306.86 per euro by 5:01 p.m. in Budapest, extending its fourth week of losses. Bonds fell for a fourth day, lifting benchmark 2022 yields 17 basis points, or 0.17 percentage point, to 9.03 percent, the highest in more than a month.

Proposed amendments to the central bank law, designed to end a row delaying the International Monetary Fund talks, are not enough to restore the Hungarian regulator’s independence, the European Central Bank said yesterday. The European Union’s most-indebted eastern member should reject the EU’s economic-policy recommendations for all member states and chart its own course for strengthening its economy, Prime Minister Viktor Orban said yesterday.

“We believe that no negotiations will take place before Hungary modifies the central bank law,” Societe Generale SA analysts wrote in a report to clients today. Investors should “remain short forint assets for now,” they said.

Default swaps protecting Hungary’s debt for five years, which rise as perceptions of creditworthiness worsen, climbed 16 basis points to a four-month high of 628, data compiled by Bloomberg shows. The yield premium investors demand to hold 10-year forint bonds rather than German bunds surged 26 basis points today to 777, the most since Jan. 17.

European stocks declined as unemployment in the euro area, the biggest buyer of Hungarian exports, jumped to a record high and a Chinese purchasing managers’ index showed manufacturing growth in the world’s second-largest economy slowed in May.

‘More Tremors’

Hungarian bonds were cut to sell from hold at Raiffeisen Bank International AG (RBI), which cited possible delays in the country’s IMF talks and risks of Greece quitting the euro in a report today from Zoltan Torok, a Budapest-based analyst.

“The weeks ahead will be filled with more tremors as no resolution is seen to come vis-à-vis the possibility of the Greek exit scenario,” Torok wrote. “The local spice is added by the government’s ambiguity towards the IMF,” undermining “the market belief that Hungary would be able to sign the loan agreement within three months,” he wrote.

Hungary’s BUX (BUX) equity index climbed 1.8 percent to close at 16,383.93, led by OTP Bank Nyrt. and oil refiner Mol Nyrt. That pared the benchmark’s weekly loss to 0.2 percent.

“We still trust that an agreement will be reached before the end of the third quarter, which could bring considerable drops in government bond yields,” Zoltan Arokszallasi and Orsolya Nyeste, Budapest-based analysts with Erste Group Bank AG (EBS), wrote in a report to clients today. “We expect the 10-year bond yield to decline to 7.3 percent by the end of the year.”

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

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

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