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Forint May Drop as Chances of Aid Deal Fall, Citigroup Says

The forint and Hungary’s local-currency bonds may slump as the probability of an aid deal with the International Monetary Fund and the European Union declines, Citigroup Inc. said.

“It remains unclear when or even whether a deal will eventually be signed,” Luis Costa and Wike Groenenberg, London-based economists at the bank, wrote in a research report dated yesterday. “We see limited value in Hungarian assets now.”

Hungary, the most indebted eastern EU member, requested aid in November to shore up its finances. Negotiations for a loan of about a 15 billion euros ($19 billion) were delayed because Prime Minister Viktor Orban resisted legal and economic conditions set by the IMF and the EU. The government may break its pledge not to sell Eurobonds before an IMF deal and such issuance would be negative for the forint and local debt, Citigroup said.

The forint pared its depreciation this week to 0.4 percent after gaining 0.1 percent to 282.44 per euro by 10:14 a.m. in Budapest. The currency has strengthened 11.5 percent this year, the most worldwide, helped in part by expectations of an aid deal.

Yields on the government’s benchmark five-year notes were little changed at 6.857 percent, compared with a year-low of 6.825 percent reached on Sep. 14.

Hungary’s central bank, which last month trimmed its benchmark rate by 25 basis points to 6.75 percent, will continue “gradual” interest rate cuts, with the next reduction possible in the coming week, the Citigroup analysts said, citing meetings with officials in Budapest this week. Expectations for one percentage point of cuts in the next 12 months looks “roughly fair,” the analysts said.

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