The forint headed for the biggest weekly gain in eight months after Hungary’s government asked for a “new type” of cooperation with the International Monetary Fund in the face of dwindling demand for the country’s debt.
Hungary’s currency appreciated 0.7 percent to 305 against the euro by 3:58 p.m. in Budapest, extending its advance this week to 1.9 percent, the most on a closing basis since March. The government’s benchmark 10-year bonds fell 1 basis point to 8.34 percent, adding to a 45 basis point drop yesterday, when the Economy Ministry first said it was starting talks with the Washington-based lender.
The Cabinet made the announcement, reversing more than a year of opposition to such a deal, after the forint plunged to a record low this week, bond yields soared to a two-year high and Standard and Poor’s last week warned it may cut the country’s credit rating to junk this month.
“The main event of the day was undoubtedly the announcement from Econony Minister Matolcsy that Hungary is seeking a new co-operation with the IMF,” Gyula Toth, a Vienna-based strategist at UniCredit SpA, wrote in a research report today. “The market reaction was clearly positive.”
An IMF team is in Budapest conducting a regular review and not there for a “negotiating mission,” Iryna Ivaschenko, the lender’s representative in Hungary, said in a statement yesterday.
“Although later in the day the fund confirmed that Hungary did not officially ask for a new loan we believe from the above statement it will be difficult for the government to step back,” UniCredit’s Toth said.
Hungary may reach an agreement with the IMF and the European Union “in the first months of next year,” the ministry said in a separate statement today. The country wants “insurance” from the IMF that doesn’t infringe on its ability to formulate its economic policy, Prime Minister Viktor Orban said in an interview on MR1 radio.
“The problem, of course, is that the government will seek to minimise the conditionality attached to any IMF deal, while at the same time the Fund is unlikely to grant assistance lightly,” Neil Shearing, London-based chief emerging-markets economist at Capital Economics, wrote in a research report today. “As such, it is difficult to see both parties reaching a mutually agreeable middle ground.”