Hungary catches the wave in international debt market return

By bne IntelliNews February 13, 2013

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Hungary finally sold its first issue of international debt in nearly two years on February 12 as it rode the continued wave of liquidity to raise $3.25bn from the sale of 5- and 10-year bonds, despite the breakdown of talks over a bailout with the International Monetary Fund (IMF).

Budapest sold $2bn worth of 10-year paper at a yield 345 basis points (bp) above US Treasuries, while a $1.25bn tranche of five-year bonds sold at a spread of 335bp, reports Bloomberg. Both issues tightened 10bp below initial pricing, to offer spreads unimaginable six months ago.

Back then, Hungary was locked in recession, struggling under the highest debt burden in CEE, at odds with banks and investors, legally challenged by the EU over constitutional changes, and failing to get the IMF to even talk to it over a bailout. None of that has changed much, but the hunt for yield around the globe has boosted Hungary's yields and the forint over the last few months.

Long suspected of "doing a Turkey" - claiming to be after a loan programme from the IMF in order to keep the markets off its back until it could regain access to the international markets - Budapest grew more belligerent with the Washington-based lender in late 2012 as it watched its Visegrad peers recording record low yields. That saw the IMF back off, but the pressure of the cash from the US Federal Reserve and European Central Bank - as well as fiscal management measures enforced by Brussels - kept the markets calm.

However, the country's first return to the international markets since May 2011 was always the real test. With Hungary facing a huge repayment schedule of €5.1bn this year - much of it to the IMF under a 2008 loan - and dwindling international reserves, a tap of the first quarter emerging market rally has been on the cards for some time.

However, the proof of the pudding is in the eating, and analysts have welcomed that Budapest has finally got the issue away successfully, saying they expect the effects of the sale to ripple out. "Hungary has covered 40% of its FX refinancing needs this year ($7.5bn in total)," point out analysts at Equilor. "[The forint] appreciated on the leaking information yesterday and we still expect some further strengthening."

At the same time, Erste points out there are still significant risks to the currency, in particular concentrated on the ongoing easing cycle being forced through the central bank and the naming of a new governor in March. "In the short run, this could trigger some appreciation on Hungarian markets," they admit. "However, we think that the longer-term outlook for the forint and 10-year yields remains uncertain, given the continued rate cuts and the still unknown steps of the new leadership in the central bank. We expect 10y yields to rise to 6.7% and EUR/HUF to be around 295 at years-end."

Hungary has benefited "tremendously" from the "global tide" of liquidity and the government's fiscal commitment, Iryna Ivaschenko, the IMF's representative in Budapest said according to Bloomberg. However, she added, the country remains "susceptible to sudden changes in investor sentiment."

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