Hungary Bonds Retreat as IMF Demands ‘Tangible Steps’ on Policy

Hungary’s bonds fell the most in more than a week and the forint dropped after the International Monetary Fund said the country needs to take “tangible steps” on resolving policy issues before aid talks can be resumed.

The currency depreciated 0.9 percent to 310.7 per euro by 4:50 p.m. in Budapest, paring its weekly gain to 1.2 percent. The government’s 10-year bonds slumped, lifting yields 12 basis points to 9.673 percent, the biggest rise since Jan. 4.

IMF Managing Director Christine Lagarde said yesterday Hungary needs to show “strong commitment to engage on all policy issues that are relevant to macroeconomic stability.” The IMF and the European Union suspended talks last month on concern central bank laws violate monetary-policy independence. There would be “no preconditions during negotiations” on Hungary’s part and the country was open to “any kind” of credit line, Prime Minister Viktor Orban said on Jan. 8.

“The views have not converged substantially and a deal, though we expect it to be reached, may lie at the end of a rocky road,” Akos Kuti, head of research at Budapest-based broker Equilor Befektetesi Zrt., wrote in an e-mailed report. The market “euphoria” this week over the prospect of a deal had been “unjustified,” analysts including Kuti wrote.

Hungarian negotiator Tamas Fellegi told reporters at the IMF yesterday that he discussed with Lagarde and the IMF staff ways to help identify “the critical issues” for aid talks to begin “as soon as possible.” No indication was given of the size of the potential aid package, Fellegi said.

European Downgrades

The forint and Hungarian bonds extended losses today as reports that several European countries may face imminent credit downgrades by Standard & Poor’s hit demand for risk.

Fitch Ratings on Jan. 6 followed Moody’s Investors Service and S&P in downgrading Hungary’s sovereign-credit grade to junk. Hungary needs to secure a bailout from the IMF in the first half to restore market confidence, Paul Rawkins, head of the emerging Europe sovereign-ratings group at Fitch, said in an interview with Bloomberg Television this week.

“Before the fund can determine when and whether to start negotiations for a stand-by arrangement, it will need to see tangible steps,” Lagarde said yesterday in an e-mailed statement after meeting Hungary’s envoy. “Support of the European authorities and institutions would also be critical for successful discussions of a new program.”

Bank Independence

The independence of the Hungarian central bank is a “prerequisite” for resuming aid talks, European Commission spokesman Amadeu Altafaj told reporters in Brussels today. The regulation in effect makes it possible to expand the rate-setting Monetary Council and strips central bank President Andras Simor of his right to name deputies.

Fellegi is scheduled to discuss the EU’s concerns on Jan. 20 with Economic and Monetary Affairs Commissioner Olli Rehn.

Hungary accepts some of the EU’s criticism of its central bank law, while the two sides remain far apart on other aspects of the legislation, Orban told MR1 state radio today.

“It is quite possible that Hungary is just playing along to temporarily pacify investors and improve its debt rollover prospect, as seen by yesterday’s auction,” Ilan Solot, a London-based emerging-market currency strategist at Brown Brothers Harriman & co., wrote in e-mailed comments.

The government yesterday sold 44 billion forint ($181 million) of bonds, 11 billion forint more than targeted, at an auction. The yield on the securities due in 2022 was 9.38 percent, compared with 9.70 percent at the last sale Dec. 29, the first time since September that borrowing costs decreased for that maturity.

‘Drastic’ Overhaul

Hungary can’t sustain paying yields around 10 percent on government debt and needs an aid package that supports market financing, Arpad Kovacs, chairman of the country’s Fiscal Council, designed to be an independent watchdog, said today in an interview with Budapest-based TV2.

Hungary needs a “drastic” overhaul of its economic policy and engage foreign investors to help save the economy from a “negative spiral” caused by high bond yields, Zsigmond Jarai, head of the central bank’s Supervisory Board, said in an interview with Vilaggazdasag published today. Jarai was Kovacs’s predecessor at the helm of the Fiscal Council before he resigned from that position this week.

The government needs to change the tax system, modify the central bank law and “let the Magyar Nemzeti Bank work,” Jarai, a former president of the bank and a former finance minister, told the newspaper.

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