Hungary IMF Talks May Avert Credit Downgrade, Gerhardt Says

Hungary seeking an agreement with the International Monetary Fund may help the country avoid its credit rating being cut to junk, said Ferenc Gerhardt, a member of the central bank’s Monetary Council.

“I don’t see a pending threat that the country’s bonds will be placed in junk category, especially after this announcement” on a potential IMF agreement, Gerhardt said on Budapest-based ATV yesterday.

Hungary, which has its credit grade at the lowest investment rank at all three major rating companies, abandoned its policy of shunning IMF assistance last week and said it was seeking an agreement with the Washington-based lender. Previously, the forint fell to a record low against the euro, government bond yields soared and Standard & Poor’s warned it may cut Hungary’s credit rating to junk this month.

“There’s no chance” Hungary will change its economic policy direction, Economy Minister Gyorgy Matolcsy said in an interview on public television M1 yesterday. “There’s ‘‘no need for that.’’

The IMF will probably exercise ‘‘strict control’’ over Hungary’s economic policy under any new program, Citigroup Inc. said.

Forint, Bonds

The forint, the worst-performing currency in the world since June 30, weakened 0.9 percent to 306.86 per euro by 9:36 a.m. in Budapest. The currency fell to a record low of 316.76 per euro on Nov. 14.

Hungarian bonds rallied on Nov. 17, reducing the yield on notes maturing in 2017 by 46 basis points, or 0.46 percentage point, to 8.24 percent after the ministry announced it was turning to the IMF. The yield, which reached a two-year high of 8.74 percent two days before the announcement, today rose 5 basis points to 8.33 percent by 9:55 a.m. in Budapest.

The country is seeking a ‘‘precautionary’’ credit line from the IMF to use only if the European debt crisis ‘‘deepens much more than currently seen,’’ Matolcsy said.

The Cabinet of Prime Minister Viktor Orban wants to boost investor confidence with a ‘‘new type’’ of cooperation that doesn’t entail a loan, the Economy Ministry said on Nov. 17. Hungary wants to reach an agreement with the IMF and the EU by February, the ministry said.

Market ‘Goodwill’

The assessment of Hungarian debt ‘‘will change’’ on the expected IMF agreement, Gerhardt said, adding that the country needs to regain the ‘‘goodwill’’ of the markets to ease the pressure on the forint.

‘‘This is why we need the IMF agreement,’’ Gerhardt said.

Hungary was the first European Union country to receive an IMF-led bailout in 2008. The country had the highest public debt level among post-communist EU members at 81 percent of gross domestic product last year.

Hungary has enough cash reserves to cover maturing public debt until the second quarter of 2012, which means the government is ‘‘not in a rush’’ to access the IMF credit and probably expects to improve the prospects of market funding just by the announcement of negotiations, Eszter Gargyan, a Budapest-based economist at Citigroup said in an e-mailed report today.

‘‘We expect prolonged negotiations and increased market volatility ahead,’’ Gargyan said.

The government scrapped two debt offerings and reduced its offer eight times at auctions in the past three months as demand waned and yields rose.

Hungary will have ‘‘no problems’’ with financing its debt from the market after the IMF announcement, Gerhardt said, adding that he hoped Hungary will get a ‘‘precautionary credit line in the end.’’

The pressure on the forint ‘‘is unjustified’’ and the Magyar Nemzeti Bank may need to ‘‘gradually increase’’ interest rates if it persists, Gerhardt said.

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