The forint may weaken to a record low against the euro, Societe Generale SA said, citing the risk that Hungary will drop its pursuit of an aid deal with the International Monetary Fund and the European Union.
Investors should sell the forint, which may slump to as low as 325 per euro, Guillaume Salomon, a London-based strategist at the bank, wrote in a report after meeting officials in Budapest last week. The forint depreciated 0.2 percent to 311.1 per euro by 4:46 p.m. in Budapest, compared with a record low of 324.24 on Jan. 5. The central bank will probably raise its benchmark interest rate, already the highest in the EU, to defend the forint, Salomon said.
The IMF and EU broke off talks on a bailout last month when Prime Minister Viktor Orban refused to withdraw new regulations the organizations said threatened the central bank’s independence. The forint rebounded last week after Orban said he was ready to accept “any kind” of credit line that strengthens the country’s market financing.
“We are far from certain as to whether the recent more conciliatory comments from the Hungarian governments towards the EU commission and the IMF are nothing more than yet another tactic to calm markets down,” Salomon wrote.
The government bonds due in 2022 slumped, lifting the yield three basis points to 9.718 percent, the highest in a week.
Hungary’s central bank may raise its benchmark rate by 50 basis points this month and again next month unless the forint returns below 300 per euro, Societe Generale’s Salomon said after meeting officials at the Magyar Nemzeti Bank during his trip. The rate-setting Monetary Council last month raised the rate to 7 percent, the highest in the European Union.
“A speedy return to 325.00 for euro-forint would unite the council in calling for an emergency meeting and a forceful response would then be delivered,” Salomon said. “We would then expect a hike in the region of 200 basis points to 300 basis points.”
IMF Managing Director Christine Lagarde said on Jan. 12 that Hungary needs to take “tangible steps” on resolving policy issues before talks can be resumed. The independence of the Hungarian central bank is a “prerequisite” for resuming aid talks, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Jan. 13.
Tamas Fellegi, Hungary’s minister in charge of talks on an international bailout, is meeting European Central Bank President Mario Draghi this week. Hungarian central bank President Andras Simor will also take part in the ECB talks.
“Conditions attached to any aid will be drastic and will touch on many recent laws and measures introduced by the government,” Salomon said.
Hungary may not obtain aid “soon” even if the ruling Fidesz party is willing to make concessions to the international lenders, Ilan Solot, a London-based emerging-market strategist at Brown Brothers Harriman, said in comments sent by e-mail today.
The Cabinet’s strategy may also be interpreted as “just going along to pacify markets in the short term” without intending to make the necessary concessions, Solot said.
“Ideally, this would give the government enough time to sell more debt at better prices and hope for a stabilization of global risk appetite,” Solot said.
Hungary last week met its target amounts at two Treasury bill auctions and exceeded the target at a bond sale, following several auctions in December and January that fell short of the state debt agency’s fundraising plans.