Hungary Repays $816 Million IMF Early to Shore Up Confidence

Hungary paid off an installment of its 2008 International Monetary Fund loan early as the eastern European Union nation seeks to boost investor confidence before tapping international bond markets.

The country repaid a 607 million-euro ($816 million) tranche of a loan obtained in 2008 before the Feb. 12 deadline, the Economy Ministry said today in a statement. The government had boosted its liquidity in November by raising 1 billion euros from a euro-denominated bond sold primarily to households, the ministry said.

“Only a country with stable public finances is capable repaying an IMF loan worth 180 billion forint ahead of schedule,” Antal Rogan, parliamentary faction leader of the ruling Fidesz party, told reporters in Budapest today.

Talks with the Washington-based lender and the EU stalled as Premier Viktor Orban refused to implement measures recommended by international creditors. Hungary’s ability to finance itself in the markets depends on whether Orban’s choice of a new central bank chief pursues more monetary easing and a weaker forint, according to Guillaume Salomon, a London-based strategist at Societe Generale SA.

The forint was down 0.9 percent to 297.90 per euro at 3:16 p.m. in Budapest today, the weakest since June 12. The currency has depreciated 2.7 percent against the euro since Dec. 21, the day before Economy Minister Gyorgy Matolcsy said the next governor should “bravely use unorthodox tools” to help the economy recover from its second recession in four years.

Possible Successor

Matolcsy is the most-likely successor of central bank President Andras Simor, whose term ends March 3, according to news websites Index and hvg.hu.

The early repayment is meant “to convey to the market that Hungary is fine, locals have got money, we’re paying it back early,” Salomon said. “But the market is looking through that” and “the test will come with the announcement of the new governor.”

The debt management agency said Jan. 14 it hired banks to arrange meetings with bond investors as the country prepares for its first bond sale on international markets since May 2011.

The original target for the November bond sale to local investors, known as PEMAK, was 400 million euros, the ministry said. A new tranche, which Hungary started selling on Jan. 17, has sold more than 275 million euros, the ministry said.

IMF Aid

The country, which requested IMF aid in November 2011, stands little chance of obtaining a bailout as the lender and the Cabinet differ on the type of rescue and the country’s growth prospects, Mihaly Varga, the nation’s chief negotiator, said in a Jan. 22 television interview.

The yield on Hungary’s benchmark 10-year bond rose 11 basis points, or 0.11 percentage point, to 6.56 percent, the highest since Dec. 10. The sell-off followed a report showing the worst slump in retail sales since June 2010.

Investors may believe a new central-bank governor will cut rates further and weaken the currency to kickstart the economy, Salomon said. “The danger with that is that they’ve lost the anchor of the IMF backdrop” and investors who bought Hungarian assets last year “will start unwinding some of those flows.”

To contact the reporters on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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