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Hungary’s Forint Bonds at Risk From Aid Threat, UniCredit Says

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Feb. 23 (Bloomberg) -- Hungary’s forint-denominated bonds may weaken on concern the government will struggle to restart talks on an international bailout, according to UniCredit SpA.

The European Union’s most-indebted eastern member has “significant financing needs” of 5 billion euros ($6.6 billion) for this year, Gyula Toth, a Vienna-based strategist at UniCredit, wrote in a research report today. Yields rose on bonds maturing in 2015 and 2017 at a biweekly bond sale today, according to data from the Debt Management Agency on Bloomberg.

The European Commission, which yesterday proposed a suspension of 495 million euros in regional development subsidies citing a failure to reduce Hungary’s budget deficit, today forecast a contraction in the country’s economy. The moves increased pressure on Prime Minister Viktor Orban, who has been trying to revive talks with the European Union and the International Monetary Fund on a bailout since the start of the year.

“So far the market has not responded to the potentially significant additional delay in the IMF/EU talks but we see room for market weakness,” UniCredit’s Toth said. “In terms of which asset class is more vulnerable, we are mostly worried about local currency bonds.”

The forint depreciated 0.1 percent to 289.7 per euro by 4 p.m. in Budapest, while the Polish zloty gained 0.4 percent. Yields on existing five-year notes were little changed at 8.747 percent, after rising 36 basis points in the past two days.

‘All Tools’

Hungary’s government sold 17 billion forint ($78 million) of the 2015 bonds today at an average yield of 8.40 percent. That compares with a yield of 8.22 percent at the last auction of the same maturity on Feb. 9. It sold 18 billion of the 2017 notes at 8.62 percent, compared with 8.30 percent two weeks ago.

Hungary’s gross domestic product will contract 0.1 percent, the European Commission forecast today, compared with a previous 0.5 percent growth estimate. Hungary’s inflation rate will average 5.1 percent, the highest in the EU, the commission said, increasing its previous 4.5 percent estimate.

The country will use “all tools” to meet its budget deficit target of 2.5 percent of gross domestic product this year, the Economy Ministry said in a statement yesterday. The measures will help avoid the suspension of EU funds, Zoltan Csefalvay, state secretary at the ministry, told reporters yesterday.

“It would seem that at least the Hungarian government is taking the warning seriously,” Thu Lan Nguyen, a Frankfurt-based economist at Commerzbank AG, wrote in a research report today. “Only if it let action follow its words will the all clear be sounded for the forint. Without concrete measures we continue to see potential for a setback for the Hungarian currency.”

The debt agency raised 10 billion in notes due in 2028 at 8.69 percent average yield, compared with 8.93 percent on Dec. 15. It raised no funds at a later, non-competitive tender.

The cost of insuring against default on Hungary’s debt with credit-default swaps fell two basis points to 525, according to data provider CMA.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

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

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