Oct. 17 (Bloomberg) -- The forint retreated from the strongest in seven weeks and Hungarian bonds slumped after Prime Minister Viktor Orban’s government said it will increase taxes on financial services to curb the nation’s budget deficit.
The currency depreciated 0.4 percent to 278.9 per euro by 4:24 p.m. in Budapest, snapping a five-day rally. Yields on the government’s benchmark 10-year bonds rose 12 basis points, or 0.12 percentage point, to 6.753 percent, the first advance since Oct. 3.
Hungary won’t meet its pledge to halve a special tax on banks next year and will increase a separate tax on financial transactions as well as introduce a levy on utility infrastructure to keep the budget deficit within 3 percent of gross domestic product, Economy Minister Gyorgy Matolcsy told reporters today. The measures will hinder the nation’s recovery from recession, said the Hungarian Banking Association, whose members include OTP Bank Nyrt.
“Orban’s government continues to cripple any prospects of medium term growth rebound in Hungary,” Luis Costa, a London-based emerging-market strategist at Citigroup Inc., wrote by e-mail on the budget announcement. “They just don’t get it.”
The forint has rallied 13 percent this year, the most among more than 100 currencies tracked by Bloomberg, as the government yielded to demands from the International Monetary Fund and the European Union to scrap laws threatening the central bank’s independence and as global demand for higher-yielding assets increased.
The cost of insuring against default on Hungary’s debt with credit-default swaps fell eight basis points to 239 today, the lowest since May 2011, according to data compiled by Bloomberg.
The decline in cost of insurance against Hungary’s bond risk has been amplified by EU rules forbidding the holding of default swaps without the underlying bonds starting next month, Gyula Toth, who helps manage $288 million at Ithuba Capital in Vienna, told a conference in Budapest yesterday.
Orban’s Cabinet has taken over $14 billion in privately-managed pension assets, levied special taxes on the energy, retail, banking and telecommunications industries and forced banks to take losses on foreign currency loans since taking office in 2010.
The budget measures announced today are “relatively unfriendly to business,” Daniel Hewitt, a London-based economist at Barclays Plc, wrote in an e-mailed report today.
“Given that this particular set of measures appears to be less growth friendly and leaning more on unorthodox polices, the new package could strain relations with the IMF,” Hewitt said.
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