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Forint Has Biggest Two-Day Loss in 2 Months on IMF Aid Concern

The forint recorded the biggest two-day drop in two months on concern Hungary will fail to secure aid from the International Monetary Fund and the European Union.

Hungary’s currency depreciated 1 percent to 284.83 per euro by 4:08 p.m. in Budapest, extending its decline in the past two trading sessions to 1.8 percent. That pared the forint’s rally this year to 10.6 percent, still the most among all currencies tracked by Bloomberg. Yields on the government’s benchmark 10-year bonds jumped 20 basis points, or 0.2 percentage point, to 7.076 percent, after advancing 18 basis points on Oct. 26.

The IMF and Hungary disagree on the type of financial assistance required, chief government aid negotiator Mihaly Varga said in an M1 television interview today, almost a year after the Cabinet made a request for support. Prime Minister Viktor Orban’s government, which has been working to cut the biggest sovereign debt burden in the east of the EU, is extending its “war” on liabilities by taking $2.8 billion of debt off the local councils’ books, Orban said on Oct. 27.

“It dawns on investors that there will be no aid deal soon,” Felix Herrmann, a Frankfurt-based analyst at DZ Bank AG, wrote in a research report today.

The IMF has not picked any date to resume aid talks with Hungary, Iryna Ivaschenko, the Washington-based lender’s representative to Budapest, said in an e-mailed reply to questions from Bloomberg last week. “Life goes on” even if there is no agreement with the IMF, Varga said on MR1 state radio today.

Debt Load

The government will consolidate the entire debt load of 1,700 municipalities that have 5,000 inhabitants or less, amounting to 97.3 billion forint ($441.4 million), Orban said. Some debt from larger local councils -- totaling 515 billion forint -- will be transfered to the central budget, he said.

Non-payment by Hungarian municipalities contributed to energy company E-Star Alternativ Nyrt.’s failure to repay all of its bondholders who hold debt that matured on Oct. 24. E-Star’s shares jumped 15 percent today after the company received payments for projects in two counties that will be used to buy back overdue bonds.

The cost of insuring against default on Hungary’s debt with credit-default swaps rose 10 basis points to 270 basis points, compared with a 2 1/2-year low of 235 basis points on Oct. 17.

The decline in Hungary’s risk premium has reduced the government’s sense of urgency for obtaining aid, said Daniel Hewitt, a London-based economist at Barclays Plc.

Hungary’s central bank will reduce its benchmark rate tomorrow by 25 basis points to 6.25 percent in a third consecutive month of cuts to help Hungary emerge from recession, according to 16 of 18 economists surveyed by Bloomberg. Two analysts expect the Monetary Council to keep borrowing costs unchanged.

“It would be a big surprise if the central bank didn’t deliver the rate cut tomorrow,” Zoltan Arokszallasi, an analyst at Erste Group Bank AG, wrote in an e-mailed report.

The European Commission will probably ask Hungary to take further measures to keep the budget deficit within the bloc’s 3 percent of gross domestic product limit, news website Bruxinfo said today, citing an unidentified “high-ranking European Union” official.

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