Orban’s IMF Demand Delay Makes Forint Most Volatile Currency

Orban’s IMF Demand Delay Makes Forint Most Volatile Currency
The forint has tumbled 8.6 percent against the dollar and 3.3 percent versus the euro since the beginning of May. Photographer: Akos Stiller/Bloomberg

Hungarian Prime Minister Viktor Orban’s six-month standoff with the International Monetary Fund over conditions for a bailout is making the forint the world’s most volatile currency.

Traders increased their bets for swings against the dollar in the next three months to 22.6 percent last week, the highest in five months and up from 15.5 percent on May 1, based on a gauge of implied volatility used for pricing option contracts on Bloomberg. Their outlook reached the most bearish since January last week, according to the so-called three-month risk reversal rate.

The currency of the European Union’s most-indebted eastern member has tumbled 9 percent against the dollar and 3.6 percent versus the euro since the beginning of May. Investors fled as delays in negotiating a $19 billion credit line with the IMF left Hungary vulnerable to Europe’s debt crisis as 10-year bond yields hit a seven-week high on June 1.

“We foresee the forint trading lower,” Bernd Berg, an emerging-market strategist at Credit Suisse Group AG’s private banking unit in Zurich, said in e-mailed comments on June 6. “There have been several periods of hopes and setbacks about a bailout over the last several months. As long as hopes do not materialize in any concrete bailout package we do not see a continued rally.”

Reject Recommendations

Six months after the IMF and EU demanded Hungary guarantee the independence of the central bank as a condition for lending, Orban has yet to revise laws that allow the government to nominate an additional vice president without consulting the bank. He also hasn’t addressed the European Central Bank’s objection to cutting Magyar Nemzeti Bank President Andras Simor’s salary by 75 percent in 2010.

The government will probably present amendments to the central bank legislation and lawmakers may vote on them within two weeks, Nepszabadsag reported, citing Antal Rogan, head of the ruling Fidesz party’s parliamentary group. Mihaly Varga, Hungary’s chief negotiator for the IMF loan, confirmed to the newspaper a new set of amendments may be submitted.

Hungary’s government debt is equivalent to about 78.5 percent of gross domestic product in 2012, exceeding the Czech Republic at 43.9 percent and Poland at 55 percent, as well as Romania, Latvia and Bulgaria, according to European Commission estimates on May 11.

The forint weakened 0.3 percent to 297.27 against Europe’s common currency at 5:17 p.m. in Budapest and depreciated 0.4 percent to 238.17 per dollar.

Driven by Politics

Credit Suisse’s Berg revised lower his three-month forint forecast to between 290 and 310 per euro on May 30 from 280 to 298. “The currency is currently entirely driven by political negotiations about a possible IMF bailout,” Berg said in a research report. He also cut the forint’s three-month forecast against the dollar to 242 from an estimate of 223 in March.

Hungary became the first EU nation to receive a bailout in 2008 after the collapse of Lehman Brothers Holdings Inc. caused global credit markets to freeze. Orban requested fresh international assistance in November 2011 after the forint slumped to a record low at the time of 317 per euro, prompting the three biggest credit rating companies to cut the country to junk.

Orban’s lawmakers approved central bank legislation at the end of December that disregarded EU and IMF objections, sending the forint as low as 324.24 against the euro.


Hungary’s economy contracted for the first time in more than two years in the first quarter as the European debt crisis sapped demand for its exports, data from the Budapest-based statistics office showed on June 8. Exports made up 87 percent of the country’s GDP in 2010, according to the latest data from the World Bank.

Hungary is the most at risk from the euro debt crisis in central and eastern Europe “as its economic growth is reliant on external demand, its fiscal situation is the weakest in the region, its external vulnerability is high and it has not as yet benefited from protection in the form of IMF/EU aid,” Anne-Francoise Bluher, a Prague-based economist at Societe Generale SA’s Komercni Banka unit, and colleagues wrote in a research report on June 7.

Bets against the forint sent the risk reversal rate versus the dollar to the most bearish level since January at minus 7 percent on June 6, compared with minus 4 on April 30, according to data compiled by Bloomberg. A negative rate signals greater demand for forint puts, or the right to sell, relative to calls, or the right to buy. The risk reversal rate last traded at minus 6.2 percent.

Safety Net

The extra yield investors demand to hold Hungary’s dollar bonds rather than U.S. Treasuries fell 10 basis points points to 599, compared with a five-month high of 679 basis points, or 6.79 percentage points, on June 1, indexes compiled by JPMorgan Chase & Co. show.

Hungary’s financing is guaranteed this year and the country aims to have an IMF “safety net” by 2013, Varga said in an interview on June 6. The delay on the vote for the central bank law will allow time to resolve differences that are blocking talks, Varga added.

“We expect the government to finalize an EU/IMF precautionary loan in the summer, since we believe Prime Minister Orban has little to gain from waiting too long,” Raffaella Tenconi, a London-based economist at Bank of America Corp., wrote in a research report on May 30. Bank of America has been “more constructive than most and we are happy to keep this call,” Tenconi said in an e-mailed response to questions from Bloomberg on June 6.


Hungary approved measures to keep the budget deficit within the EU limit of 3 percent of GDP on May 9. The plans will improve the budget balance “sustainably in the long term,” Johannes Hahn, the EU commissioner for regional policy, told Budapest-based newspaper Magyar Nemzet last week.

The cost of insuring Hungarian bonds with credit-default swaps for five years reached a five-month high of 630 basis points on June 5 and last traded at 574, data compiled by Bloomberg show. The contracts, which rise as perceptions of creditworthiness worsen, surged 96 basis points in May, compared with 71 basis points for Poland and 21 basis points for the Czech Republic.

Hungary’s bonds are rated one level below investment grade at Ba1 by Moody’s Investors Service and BB+ by Standard & Poor’s and Fitch Ratings, while Poland and the Czech Republic are at investment grade.

Last week’s strengthening in the forint was a rebound caused by “excess volatility,” Gergely Tardos and Levente Papa, Budapest-based analysts at OTP Bank Nyrt., Hungary’s largest lender, wrote in a research report on June 8.

“Unless fundamental changes happen -- i.e. a deal with the EU and IMF -- Hungary remains vulnerable,” Tardos and Papa wrote. “Another selling wave is just a question of time.”

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