Hungary's Surrender on Budget Deficit May Boost Forint, Bonds
Hungary bowed to pressure from the European Union and International Monetary Fund yesterday, giving up its three-month battle for a wider budget. The country’s currency and bonds rose.
The government is committed to cutting the shortfall to less than the EU limit of 3 percent of gross domestic product next year, Economy Minister Gyorgy Matolcsy said at a news conference in Budapest.
“This is very positive, it seems to be a turnaround,” Nigel Rendell, senior emerging-markets strategist at RBC Capital in London, said in a phone interview. “My only question is why they didn’t do this earlier?”
The cost of insuring Hungary’s debt against default has risen the most in the world since Prime Minister Viktor Orban took office in May amid pledges to boost growth and end five years of austerity. Talks with the EU and IMF, which gave Hungary a 20 billion-euro ($26 billion) bailout in 2008, broke down July 17 after Orban refused to accept his predecessor’s pledge to cut the deficit to 2.8 percent of GDP next year.
Hungary sold 95.2 billion forint ($425 million) of bonds at auction today, 45.2 billion forint more than planned. The yield on the country’s bonds maturing in 2013 fell 6 basis points to 7.01 percent. The forint advanced for a second day, rising 0.8 percent to 284.73 per euro at 6:28 p.m. in Budapest.
The currency may strengthen to 280 within five days and 270 by year-end, said Simon Quijano-Evans, head of emerging-market strategy at Credit Agricole Cheuvreux in Vienna. Rendell estimated the forint may reach 270 per euro by the end of 2011.
The government’s commitment to the 3 percent deficit target came after EU finance ministers told Hungarian officials during a meeting in Brussels this week that they had no other choice if the country wanted backing from the bloc, Matolcsy said. The Cabinet previously accepted a 3.8 percent goal for this year.
“The European Union will provide all its support for a deficit below 3 percent of gross domestic product but won’t back us with a higher deficit,” Matolcsy said.
The budget pledge will increase investor confidence, guaranteeing that Hungary can finance its deficit on the market through 2011, Matolcsy said. That will eliminate the need for a new loan from the IMF or EU after the current bailout expires in October, he said.
Hungary, the most indebted eastern member of the EU, was the first in the bloc to get an IMF-backed lifeline to avert a default during the credit crisis, when demand for forint- denominated bonds dried up. The economy shrank 6.3 percent last year, Hungary’s worst recession in 18 years. The government has been financing its shortfall from the market since April 2009.
“This is exactly the message we need from the government,” Quijano-Evans said. “We need positive encouragement, confidence-building comments.”
Some investors may wait for details about Orban’s plans and proof that the government will follow through after being repeatedly spooked by the Cabinet’s communications, said Peter Attard Montalto, a London-based emerging market economist at Nomura International Plc.
Orban came to power saying the 2010 shortfall might be as much as 7 percent of GDP after the previous administration lied about public finances. In June, a ruling party official said Hungary had a “slim chance” of avoiding a Greece-like crisis. Government officials only distanced themselves from the comparison after the forint plunged.
The government initially indicated it wanted a precautionary loan from the IMF after the current program runs out, then said it didn’t need one after talks broke down.
“I remain very skeptical and would not be surprised to see the rhetoric pendulum swing back the other way when and if the market calms down on the back of what was said yesterday,” Montalto said today in an e-mail. “We still have zero real details on next year’s budget.”
Standard & Poor’s said July 23 it may cut Hungary’s BBB- credit rating one step to junk after the IMF talks broke down. Moody’s Investors Service, which rates Hungary Baa1, two grades higher than S&P, also said it was reviewing the country for possible downgrade.
Credit-default swaps on Hungary’s debt have risen 52 percent since May 29, when Orban took office. The cost of insuring the country’s debt against default fell 5.5 basis points to 364 basis points today, according to data provider CMA. That compares with about 912 basis points for Greece and 370 for Ireland, whose credit rating was cut by S&P on Aug. 24.
Matolcsy said the government needs 200 billion forint of revenue from a special tax on financial institutions this year and next to meet its budget targets. In addition, it has to cut spending by as much as 200 billion forint in 2011 and the economy must grow by at least 2.5 percent.
The commitment to financial discipline will also bring Hungary closer to adopting the euro as one of the criteria for adopting the currency is a deficit below 3 percent of GDP. Hungary, which joined the EU in 2004, has repeatedly postponed target dates because of its ballooning budget shortfall.
While the government “doesn’t see clearly” when Hungary will switch to the common currency, the Cabinet may be in a position in 2012 to set a target date, Matolcsy said.