Hungary is on the brink of breaking a deadlock to start bailout negotiations with the International Monetary Fund after a seven-month stalemate that has made its currency the world’s most volatile.
The IMF agreed to start aid talks as soon as legislators approve proposed changes to a disputed central bank law, which has blocked talks since December, Managing Director Christine Lagarde said in a letter to Hungarian leaders, distributed to reporters yesterday. Parliament will vote on the amendments by July 12, government negotiator Mihaly Varga said. The forint, stocks and bonds gained and Hungary’s default risk fell after the announcement.
“This is clearly a positive,” Simon Quijano-Evans, head of emerging-market research for Europe, the Middle East and Africa at ING Groep NV, said by phone from London. “There’s room for more yield and spread compression for bonds.”
Prime Minister Viktor Orban requested the aid in November as the country’s credit grade was cut to junk and the forint fell to a record against the euro. Preliminary talks broke down in December after Hungary passed a law that the IMF and the European Union said may curb central bank independence.
The yield on the benchmark 10-year government bond rose 2 basis points to 8.03 percent after dropping 3 basis points yesterday. It was as high as 10.8 percent on January 4, which prompted the government to announce a drive to obtain a bailout to reduce borrowing costs. The cost of insuring against non-payment on Hungary’s debt with credit-default swaps for five years fell to 520 basis points, the lowest since May 10, according to data compiled by Bloomberg.
The forint weakened 0.7 percent to 286.6 per euro by 9:34 a.m. in Budapest after paring its loss to 0.1 percent yesterday. It has risen 9.9 percent against the euro this year, the best performance in the world behind the Colombian peso. The benchmark BUX stock index has advanced 6.6 percent this month and rose 0.1 percent to 17,005.64 today.
Hungary expects to sign a bailout agreement on a credit line of “close to” 15 billion euros ($19 billion) by the end of October at the latest, Reuters reported, citing Varga. An accord may be completed “any time from mid-August until the end of October,” Varga told Reuters, adding that the government is seeking a flexible credit line rather than a standby agreement from the Washington-based lender.
The government submitted amendments to the central bank law on June 21. The proposed changes affect the handling of information on foreign-currency reserves, the powers of the rate-setting Monetary Council, the number of policy makers, the dismissal of MPC members and the governor of the central bank, according to the amendments.
Orban also pledged not to enlarge the rate-setting Monetary Council and to refrain from naming a third vice president to the Magyar Nemzeti Bank before the end of President Andras Simor’s term in March.
“The proposed amendments and commitments address our key concerns,” Lagarde said in her June 25 letter to Varga and Simor. The IMF’s local representative office confirmed in an e-mail that the lender sent a letter to the government. “Once the proposed amendments are adopted, the Fund will be ready to enter into negotiations on a joint IMF/EU program together with our European partners.”
The amendments will be approved by Parliament on July 12 at the latest, opening the way for aid talks from the middle of next month, Varga said. Hungary is waiting for the opinion of the European Central Bank before approving the amendment, Varga said.
“It’s definitely good, supportive and confirms the assumption that this government is finally accelerating the pace of multilateral negotiations,” Luis Costa, a London-based emerging-market strategist at Citigroup Inc., said by phone yesterday. “If there’s no massive delay following the voting it’s fair to believe the country will have a package secured by the beginning of the fall.”