Bondholders Supplant East Europe IMF Aid as Yields Decline
Hungary, Romania, Serbia and Ukraine, taking advantage of record low borrowing costs, sold $7.25 billion of notes last month, snubbing fiscal requirements from the Washington-based IMF for loans. At yields as high as 7.6 percent, the securities lured investors seeking better returns than the average 4.67 percent for emerging-market dollar-denominated bonds.
The sales are helping the former communist nations raise financing without accepting the budget discipline demanded by IMF loans. From Bucharest to Belgrade, the debt is in demand as zero percent interest rates and increased monetary easing in developed nations push investors to search for higher yields in riskier securities.
“We see a few countries with worsening economic policies and the market is not punishing them,” Viktor Szabo, who helps manage $11.8 billion at Aberdeen Asset Management in London, said by e-mail Feb. 15. “In the current abundant liquidity environment, the anchor role of the IMF and other international financial institutions is less important as investors are desperately looking for yields.”
Hungary’s dollar bonds have returned 21 percent in the past year, almost twice the 11 percent average for emerging-market debt in JPMorgan Chase & Co.’s EMBI Global Diversified Index. The rally cut Hungarian yields by 219 basis points, or 2.19 percentage point, to 5.33 percent, while the EMBI average dropped 72 basis points. Ten-year U.S. Treasury yields fell to 1.92 percent from 1.98 percent while the S&P 500 Index rose 15 percent in the past 12 months.
Investors are taking on risk by purchasing dollar bonds from borrowers with policies that the IMF says aren’t sustainable to close fiscal deficits.
While Ukraine complied with IMF appeals to increase the pension age, President Viktor Yanukovych has ruled out raising heating prices to cut the budget gap. The lack of “corrective policies” leaves Ukraine “vulnerable to shocks,” the IMF said in a Feb. 12 report. Hungary, with the highest debt-to-gross domestic product ratio among the European Union’s eastern nations, refused calls for spending cuts. Serbia sold debt as it pursued IMF talks for more aid and Romania offered bonds while facing demands to step up state asset sales.
“The advantage has shifted back to the issuers for now -- they can afford to ignore the IMF and its list of demands,” Chris Weafer, chief strategist at Sberbank Investment Research in Moscow, a unit of Russia’s biggest lender, said by e-mail Feb. 25. “It is hugely dangerous.”
Investors who piled into Ukraine’s 10-year bonds sold in 2007 at a yield of 6.75 percent saw prices plummet a year later as the global financial crisis closed market access and forced the nation to seek an IMF bailout. Yields reached 27 percent in 2009.
IMF financing has helped countries recover. Since the start of 2008, the lender has made 143 new commitments totaling $638 billion. Of that, more than $164 billion has been disbursed. Among the 44 countries currently with loans, Colombia, Mexico and Poland have undrawn credit lines totaling $110 billion, according to IMF data as of Jan. 31.
Silvia Zucchini, an IMF spokeswoman in Washington, declined to comment in an e-mail Feb. 25 on the impact of bond sales on the lender’s relations with potential borrowers.
Hungarian officials began meeting bondholders in Los Angeles Jan. 28, the same day that the IMF issued a report saying that “on the basis of current policies, economic activity is expected to stagnate in 2013.” Prime Minister Viktor Orban said two days later in Brussels that Hungary was ending efforts to obtain an IMF agreement, following a year of disputes over central bank independence and proposals to replace tax increases on banks and energy companies with spending cuts.
With $99 billion of debt equal to 79 percent of GDP -- the highest proportion among the 10 eastern EU countries -- Hungary offered its first foreign bonds in almost two years Feb. 12, raising $3.25 billion and paying a record-low yield of 4.2 percent on five-year notes. The sale showed Hungary can fund itself without the IMF, Orban said on state-run MR1 radio Feb. 15.
Yields on the 2018 dollar bonds rose as high as 4.5 percent Feb. 27 and were at 4.38 percent today. The government will apply this month to renew a filing with U.S. regulators to issue dollar bonds, Laszlo Buzas, deputy chief executive officer of the Debt Management Agency, told reporters in Budapest Feb. 28.
Ukraine, with debt equivalent to 36.8 percent of GDP according to the Finance Ministry, sold $1 billion of bonds due in November 2022 at a yield of 7.625 percent last month, compared with 9.25 percent on five-year notes issued July 2012. The yield on the newer debt has declined since the sale to 6.94 percent, data compiled by Bloomberg show.
“The ease of borrowing in the capital markets takes the pressure off of these governments to pursue structural reforms or to enter into an IMF program,” Alexander Moseley, a senior portfolio manager at Schroders Plc (SDR) in New York, said by e-mail Feb. 15. “Countries with weak policies and a large stock of external debt, such as Hungary and Ukraine, are much less likely to improve in credit quality and will remain highly vulnerable to a downturn in market conditions.”
Poland’s debt, at 56 percent of GDP, ranks second highest among the EU’s 10 former communist members, followed by Slovenia at 54 percent and Romania at 38 percent, according to data for 2012 published by the European Commission on Feb. 22. Serbia’s public debt was equivalent to 59.2 percent of GDP at the end of last year, according to the central bank.
In Romania, the government received 20 billion euros ($26.2 billion) of loans from the IMF and the EU between 2009 and 2011 to help the nation emerge from a two-year recession.
The country hasn’t drawn any money from the current 5 billion-euro precautionary accord agreed to in early 2011. The IMF requires Romania to sell minority stakes in its natural-gas and nuclear power companies to meet IMF terms, and Prime Minister Victor Ponta told private television Digi24 Jan. 28 that the sales are “overdue.” The government issued $1.5 billion of 10-year bonds Feb. 14 at a record-low 4.5 percent yield. The debt yielded 4.44 percent today.
Romania’s experience shows that IMF aid is no financial panacea, Andras Giro-Szasz, Hungary’s government spokesman, told M1 state television on Feb. 25. “It obtained a standby loan and it was still forced to sell bonds, but what conditions did Romania have to submit to?” said Giro-Szasz.
The IMF suspended Serbia’s $1.3 billion loan in February last year after the previous government failed to meet fiscal targets. “Fiscal consolidation is an urgent priority,” the IMF said in a Nov. 20 statement.
Serbia can attract bondholders with or without IMF assistance, Finance Minister Mladjan Dinkic said at a conference in Vienna on Jan. 15. A month later, the government issued $1.5 billion of seven-year bonds, covering 75 percent of borrowing planned on international markets for this year, at a record-low yield of 5.15 percent. They yielded 5.06 percent today. IMF officials will return to Serbia in May, Dinkic said at a news conference in Belgrade Feb. 7.
“The IMF is seeing its leverage reduced because countries can fund themselves in the market,” Tim Ash, chief emerging- market economist for Standard Bank Group Ltd. in London, said by e-mail Feb. 22. “This is a negative development as countries like Ukraine are desperately in need of reform and need an IMF anchor to push reform forward.”
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