Looking forward to a "strategic alliance" with the central bank starting next year, Hungary could spend another year sitting out of the international debt markets, the country's economy minister claimed on December 15, despite a heavy redemption schedule of hard currency debt and claims from other officials that a Eurobond is likely in the first quarter.
"I am not certain that we need to issue foreign-currency denominated bonds on the international markets next year," Gyorgy Matolcsy told public radio station MR1-Kossuth, according to Bloomberg. "We can finance ourselves on the forint market."
That is at odds with a claim from Mihaly Varga - head of the country's International Monetary Fund (IMF) talks - on December 11 that Hungary "will surely test the markets in the first quarter". However, investors are unlikely to be shocked should it turn out Matolcsy is yet again trying to buy a little time and space.
Budapest last tapped the international market in May 2011. Since then, it has relied on local currency auctions to fund its borrowing needs as it has discussed a bailout with the IMF - a move forced by skyrocketing yields and a buckling currency at the end of last year. However, apparently confirming suspicion that the government had little real intent to accept the terms and conditions attached to a loan programme, those negotiations now look all but over. Meanwhile, Hungary is clearly keen to tap the emerging market bond rally, which has seen yields hit record lows for its Visegrad peers, albeit such a move would be taken as practical confirmation that no deal will be reached with the Washington-based lender.
Yet the risk of relying on forint debt is also high. Without accessing the international markets to pay off its maturing international obligations next year, Hungary would need to continue swap local currency at the central bank, draining reserves and therefore damaging investor confidence. The Magyar Nemzeti Bank's international reserves dropped to €33.87bn at the end of November, their lowest since February 2011, on the back of a maturing €1bn foreign currency bond and redemption of about €665m to the IMF under the previous 2008 loan programme. At the same time, the budget would be highly exposed to any drop for the forint.
That risk would be significant should the emerging market bond rally - driven by high global liquidity - run out of steam. That would leave investors with a picture in which there is little prospect of the IMF reining in Matolcsy's more "creative" economic policies, and a central bank - until now one of the government's sternest critics - that will play along.
Prime Minister Viktor Orban and his allies can hardly wait for the latter course of events. With the term of Governor Andras Simor - who has sternly opposed government pressure for rate cuts due to inflation risk - set to end in March, Matolcsy said in the same interview that the change of guard will allow the government to build a strategic alliance with the bank in order to boost the economy.
"I don't think that in these crisis years any central bank in the world would and could keep only one aspect in the forefront: the aspect of inflation," Matolcsy said, according to Reuters. "Just look at how the European Central Bank has switched to an entirely different monetary philosophy in the crisis years post-2008."
Orban is unlikely to allow the market to push him into appointing anyone that falls too far from the Fidesz tree, and Matolcsy's name is one of the most common to crop up in speculation. "There are many names floating around these days and weeks, but I myself have not received such a request," the minister said. "I am sure, as this has been mentioned, that next year Hungary's central bank will have a leadership that will be in a strategic partnership with the government."
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