Hungary claims to open talks with IMF

By bne IntelliNews November 17, 2011

bne -

Hungary saw yields on its 10-year sovereigns spike on the morning of November 17. Later the same day, it announced it has restarted talks with the International Monetary Fund, suggesting the government may finally realize the size of the risk it is facing.

Whilst Budapest continues to complain that it is being unfairly punished by the markets, investors illustrated again on November 17 that due to questions over Hungary's debt rating, economy and regulatory environment they insist on pushing borrowing costs skywards.

The average primary yield on Hungarian sovereign 10-year bonds rose to 8.78% at the country's latest debt auction, 61 basis points above the previous auction two weeks before. That prompted healthy oversubscription for the offer. The three-year and five-year issues also saw strong interest as they pushed above the 8% mark for the first time since the depths of the last crisis in 2009.

Hungary's state debt agency AKK has seen several auctions pulled in the last month or so after trying to push yields lower, as government officials complain that the country is being unfairly punished by the markets, which have been unnerved by the threat of a downgrades to junk status and the government's "unorthodox" regulation policies.

The auction of HUF58.6bn (EUR188m) on Thursday illustrated that investors - likely in anticipation of a hike in benchmark rates, intervention or a rapprochement with the International Monetary Fund - are ready to offer the country finance, but only at sky high rates. Across Europe, a 7% yield is seen as a threshold after Ireland and others were forced to seek help from the IMF on passing it.

Whilst Hungarian officials have argued that the markets are unfairly ignoring the country's relatively strong fiscal indicators, such as a forthcoming budget surplus for the year and lowered debt, investors are aware that these are largely due to one-off measures, and that growth forecasts for the coming year have fallen drastically. That could complicate the country's forex refinancing need for EUR5bn in 2012, whilst the loss of investment-grade status would see many funds forced to liquidate Hungarian bonds.

All this worry saw AKK pushed into accepting average yields on three- and five-year bonds rise around 70 bp above the last auction on November 3, reports MTI. The yield on the three-year paper rose 73 bp to 8.38%; the yield on the five-year bond grew 76 bp to 8.68%, pushing the auction to oversubscription of around three times. That saw the debt management agency expand its total offer at the auction from HUF36bn to HUF46bn.

The continued rise in borrowing rates only prompts more urgent questions over when the government or central bank will stop trying to blame someone else and act. However, a chink in the government's defensive stance appeared the very same afternoon.

The government claimed, somewhat vaguely, that it has begun discussing a "new type" of cooperation with the IMF late on the afternoon of November 17. Whilst the wording of the statement left some analysts cynical that it is a real attempt to reinvigorate cooperation, on the flip side, the announcement represents a stark contrast to the strongly negative attitude in recent official statements.

Tim Ash at RBS says the statement suggests that Budapest will seek either an FCL (flexible credit line) or PCL (precautionary credit line), warning that the former looks very unlikely. "A "Flexible" credit line ... is for fundamentally sound economies, where conditionality is non-existent," he wrote in a note. "Countries like Poland, Mexico and Colombia qualify for these, but Hungary surely would not."

"Markets I think also want to see conditionality," he continued, "as they want the government to be given some strait jacket for reform. The minimum hence would be a precautionary arrangement, with some cash attached (but no firm disbursement schedule agreed) but with conditionality. I sense the IMF would also not agree to any "new" form of cooperation with Hungary. They will want conditionality as well, and Orban et al, have not gone out of their way to win friends and influence people either in Washington or Brussels in recent months, so I don't sense they will be given any favours ... The Hungarians will presumably want as little conditionality as possible, so this will make for interesting negotiations if the two sides are thinking about a PCL."

However, he notes that the fact that Budapest is ready to talk with the IMF at all is significant. "It is an abrupt turnaround for the government," he suggests, "and perhaps they are beginning to realise the risks that they face - also interesting earlier in the week that the NBH hinted of modest rate hikes, so the policy elite are beginning to respond to the risks."

The forint and equities market duly leapt on the news. However, that might have been a little premature, with both the IMF and the Hungarian central bank releasing statements last night saying that they know nothing of such talks.

Iryna Ivaschenko, IMF representative to Hungary said: "The IMF team currently in Budapest is conducting a regular Article IV review and the second review under Post-Program monitoring of the Hungarian economy. The mission for the Article IV consultation is not a negotiating mission, but a mission to conduct the regular economic surveillance that the IMF performs for all member countries. The IMF has not received a request from the authorities to initiate negotiations on a Fund-supported program."

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