Hungary’s forint rose to the strongest this year as bets the country will agree to conditions imposed by the International Monetary Fund and European Union for a bailout helped exceed the sale target at a bond auction.
The forint appreciated as much as 1.9 percent and was up 1 percent at 308.52 per euro at 5 p.m. in Budapest, the strongest closing level since Dec. 27. It reached a record low of 324.24 on Jan. 5. The government sold 44 billion forint ($181 million) of debt, 11 billion forint more than targeted, in notes maturing in 2014, 2017 and 2022, according to data from the Debt Management Agency posted on its Bloomberg page.
Hungary’s currency rebounded and yields retreated after Prime Minister Viktor Orban moved to resolve a dispute about the independence of the central bank that led the EU and IMF to break off talks on financial assistance last month. The European Commission said yesterday the country faces the suspension of some its funding and possible sanctions for breaching budget-deficit targets and for laws that that may contravene EU rules.
“The probability of striking a deal has increased,” Janos Samu, a Budapest-based economist at Concorde Securities, told reporters, adding that the prospect of an aid agreement boosted the forint. The government is “ready to yield more to the IMF and the EU in exchange for a loan. It remains to be seen if it’s enough.”
Hungary is “ready to negotiate all the points” for a loan agreement and is waiting for “convincing” arguments from the bloc on any objections to its laws and policies, Orban said at a briefing with foreign correspondents in Budapest today.
The yield on the 2022 securities was 9.38 percent at today’s auction, compared with 9.70 percent at the last sale Dec. 29 and the first time since September that borrowing costs decreased for that maturity.
Tamas Fellegi, the minister leading the foreign-aid talks, is in Washington and will meet IMF Managing Director Christine Lagarde today. Fellegi is scheduled to talk with European Economic and Monetary Affairs Commissioner Olli Rehn on Jan. 20 to discuss Hungary’s central bank law and will also meet European Central Bank President Mario Draghi next week.
“On Hungary, we are really very concerned,” Draghi told reporters in Frankfurt today. “The ECB is extremely careful and attentive to signs of pressure being put by the decision making bodies of any member state on their” national central banks.
While an agreement between Hungary and the IMF to unlock financial aid would be positive, it wouldn’t automatically trigger a change in the credit rating or its outlook, Matteo Napolitano, a director of sovereign ratings at Fitch Ratings, told reporters in Warsaw today. Fitch lowered its rating on Hungary on Jan. 6, the third assessor to downgrade the country’s debt to junk in two months.
The benchmark BUX index of shares gained 1.6 percent as OTP Bank Nyrt., Hungary’s largest lender, jumped 4.4 percent. Hungarian stocks and the currency extended advances today after Spain sold twice the planned amount of bonds at an auction and Italy’s borrowing costs fell at a bill sale.
Hungary’s auction result “is more the general sentiment rather than Hungary-specific factors as a lot of uncertainty still remains,” Esther Law, a London-based strategist at Societe Generale SA, wrote in comments sent by e-mail. “This is consistent with Fitch’s comments on the IMF deal.”
At the Dec. 29 auction, the government sold 15 billion forint in bonds, 18 billion forint less than the target, as borrowing costs rose to the highest in more than two years, while the state rejected all bids for three-year notes.
Hungary raised the planned amount of debt at two Treasury bill sales this week and the cost of insuring against a default on Hungary’s debt with credit-default swaps fell from a record high. The CDS contracts fell to 671 basis points today from 679 basis points yesterday, compared with a record 735 basis points last week, according to data provider CMA. A basis point is one hundredth of a percentage point.
“The IMF and the EU are cautious and could prove difficult partners to conclude a new financial assistance deal as quickly as Hungary would currently wish for,” Agata Urbanska, a London-based economist at HSBC Bank Plc, wrote in a research report today. “The slower pace of talks means the elevated risk premium prevailing for longer.”