Forint Weakens as Hungarian Default Swaps Climb on IMF Concern

Nov. 21 (Bloomberg) -- The forint slid against the euro and the cost of contracts insuring Hungarian bonds rose on concern the European Union’s most-indebted eastern member may struggle to get International Monetary Fund support.

The Hungarian currency lost 0.8 percent to 306.28 per euro by 3:48 p.m. in Budapest, snapping a 4.2 percent gain in the previous four days. Five-year credit-default swaps, which climb as creditworthiness perceptions worsen, rose to 593 basis points from 581 yesterday, according to data provider CMA.

Hungary, which received an IMF-led bailout in 2008, is seeking renewed talks with the fund, the Economy Ministry said on Nov. 17, sending the forint and bonds rallying. The move may help the country avoid losing its investment-grade bond rating, central banker Ferenc Gerhardt told ATV channel yesterday.

“We are still of the view that one of the three main rating agencies will downgrade Hungary by the end of the year,” BNP Paribas SA strategists led by London-based Bartosz Pawlowski said in a report today. Talks with the IMF will be lengthy as the deal “is likely to involve conditions that the Hungarian government might be reluctant to fulfill at first,” they said.

Global stocks fell and most emerging-market currencies slid as an impasse on U.S. budget cuts raised speculation the world’s largest economy may face another credit downgrade. Data signaled faltering economic growth in Asia and Germany’s Finance Ministry said the country’s growth is “noticeably slower” this quarter.

Bleak Outlook

“One of the most important reasons why central and eastern European currencies are weak is the bleak eurozone growth outlook, and that won’t change anytime soon,” Pawlowski and colleagues wrote.

The BUX index of shares fell 1.4 percent, led by Mol Nyrt., the country’s largest oil company, and OTP Bank Nyrt., the biggest lender.

An IMF team will cut short a regular monitoring visit in Hungary and return to Washington to discuss the financial-support request with the lender’s management, Managing Director Christine Lagarde said today. The government reversed a policy of shunning IMF assistance after the forint fell to a record low against the euro and yields jumped to a two-year high last week.

While Hungary has a “long way” to go to reach an agreement with the IMF, obtaining the safety net would reduce pressure on the country’s rating, Fitch Ratings said on Nov. 18. The company cut its outlook on Hungary’s BBB- rating, the lowest investment grade, to negative from stable on Nov. 11, matching Standard & Poor’s and Moody’s Investors Service.

‘Unpredictable’

S&P warned that same day that it may cut Hungary to junk this month, citing the government’s “unpredictable” policies, including extraordinary company taxes and measures forcing banks to swallow exchange-rate losses from foreign-currency loans.

Risks to financial stability and high external and public debt levels are set to “disqualify Hungary from a Precautionary Credit Line,” said Eszter Gargyan, a Citigroup Inc. analyst in New York. “The IMF is more likely to open a credit line to Hungary in the form of a Precautionary Stand-By-Arrangement that provides strict control over domestic policies.”

The government today sold a planned 50 billion forint ($220 million) of six-week Treasury bills, with investors bidding for more than twice the amount, auction results published by the debt management agency on Bloomberg show. The state rejected all bids at the previous sale of the same maturity on Nov. 14.

‘Precautionary’

While Hungary doesn’t plan to tap IMF funds, it seeks a “precautionary” loan program that would reassure investors and help the government finance itself in the market, Economy Minister Gyorgy Matolcsy told lawmakers today. “There is no chance we will change our economic policy, there’s no need for that,” he said on M1 television yesterday.

Hungarian bonds were little changed today, with the yield on benchmark securities maturing in 2017 last trading at 8.275 percent. The yield jumped to 8.62 percent on Nov. 15, the highest closing level in more than two years.

“Given that existing government cash reserves are likely to cover public debt maturities until the second quarter of 2012, the government is not in a rush to access credit and is probably expecting to improve the prospects of market funding just by the announcement of negotiations with the IMF,” Gargyan wrote in an e-mailed report today. “We expect prolonged negotiations and increased market volatility ahead.”

To contact the reporters on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net; Edith Balazs in Budapest at ebalazs1@bloomberg.net

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