Orban Struggles to Curb Foreign Demand for Hungarian DebtAndras Gergely and Marton Eder
Foreign investors are building up forint bond holdings to the most in five months, driving yields to record lows, as they disregard efforts by Prime Minister Viktor Orban to cut Hungary’s reliance on international funding.
Non-residents raised their holdings of domestic government debt to 4.97 trillion forint ($21.9 billion) on June 12, the highest level since January, according to data from the Debt Management Agency. Foreigners held 41.7 percent of outstanding notes as of April, compared with 19 percent for higher-rated Romanian leu securities. The yield on Hungary’s benchmark 10-year forint bonds fell to a record 4.41 percent on June 6 and rose to 4.64 percent by 4:37 p.m. in Budapest.
While Orban is seeking to reduce the risk of a potential selloff fueled by overseas investors, he’s benefiting from falling borrowing costs as foreigners snap up the debt amid Europe’s longest cycle of interest-rate cuts by the central bank. The government also suspended Eurobond issuance for the rest of the year in May and refashioned debt instruments to encourage reliance on household savings and domestic banks.
“While foreign financing contains risks, it also conveys trust in Hungary’s debt,” Sandor Jobbagy, a fixed-income analyst at CIB Bank Zrt., a unit of Intesa Sanpaolo SpA, said by phone yesterday. “Reducing Hungary’s external vulnerability is definitely important. Foreign ownership of forint debt is very concentrated. It’s a slow process.”
Orban’s self-proclaimed war against “debt slavery” means he is expanding budget financing through debt sold directly to Hungarian households and seeks to phase out foreign-currency mortgages, the main source of weakness in the country’s banking sector after the forint currency depreciated.
The forint strengthened 0.2 percent to 306.93 per euro today, having lost 3.2 percent so far this year.
The outstanding amount of forint-denominated retail bonds, designed for households, rose to 1.9 trillion forint by April, a fourfold increase from 2011, according to debt agency data.
“These products are definitely quite popular and the stock is growing,” Gyula Lencses, a money manager who helps oversee 207 billion forint in assets at Raiffeisen Bank International AG’s fund unit in Budapest, said by phone yesterday.
While Orban’s government tried to cut public debt by taking $13 billion in privately managed pension assets in 2011, the move constrained domestic demand for government securities, according to CIB Bank’s Jobbagy. “It was partly foreigners who made up for the drop,” he said.
Orban, elected to a second four-year term in April, has struggled with his pledge to reduce the country’s overall indebtedness. Debt is set to rise to 80 percent of gross domestic product this year from 79 percent in 2013, the highest among the former communist members of the European Union, according to European Commission data published in May.
The debt agency said May 21 it would halt Eurobond sales for this year and meet issuance targets by selling forint notes. While the ratio of government debt denominated in foreign currency fell to 41.6 percent by April from a record 49.7 percent in November 2011, it remained above the 31 percent level before Hungary’s 2008 bailout by the International Monetary Fund, the debt agency data showed.
The “welcome” increase in foreign holdings in forint-denominated debt in recent weeks “in no way threatens” the government’s plans to cut foreigners’ share in total government debt, the debt agency, known as AKK, said in an e-mailed response to questions from Bloomberg News yesterday.
The agency is on track to reduce that share to 53 percent by the end of this year from 59 percent at the end of 2013 and compared with a peak of almost 71 percent in September 2011, the agency said.
“The expected 6 percentage-point cut this year can probably be realized without major market shocks,” AKK said.
Orban’s Fidesz party said June 16 it will pass laws that will cost banks “hundreds of billions of forint” after the country’s top court ruled this week that few of the $15 billion in foreign-currency mortgages meet criteria for fairness.
“Phasing out foreign-currency loans by causing a shock and weakening the stability of the banking sector wouldn’t send a positive message,” Raiffeisen’s Lencses said. “So far, the government has mainly focused on communication and procrastinating, which will have to end. I think they’ll be more cautious than their words suggest.”