Hungary plans forex debt issue ahead of IMF deal

By bne IntelliNews October 12, 2012

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Hungary is set to launch its first foreign currency denominated debt this year with a €200-300m euro issue, Government Debt Management Agency AKK announced on October 11. However, with the markets on the watch for any concrete evidence that Budapest is insincere in its talks with the International Monetary Fund (IMF) over a bailout loan, the issue will target domestic retail investors.

"The AKK targets primarily retail buyers with the new government paper, but it also intends to give a possibility to corporate buyers as well to buy the papers," AKK's deputy-CEO Laszlo Andras Borbely said at a press conference, reports MTI news agency.

The agency plans to sell up to €300m of the bonds initially, with the launch set for the coming weeks. The bond will pay a 2.5% premium above the average Eurozone inflation rate published by Eurostat. Investors will not subscribe to buy the bonds, but will purchase them from stocks at a determined price. If stocks are depleted, the Treasury may offer more bonds or issue a new series.

Borbely was at pains to state that the bond will not replace the foreign-currency debt aimed at international markets that is planned in AKK's annual issue programme for 2012, which includes gross foreign bond issues of €4bn, plus another €800m in long-term project financing borrowing, designed to refinance €4.8bn in expiring foreign-currency debt.

Hungary last issued a euro-denominated bond, of €1bn, on global markets in May 2011. The seven-year bond, which was also Hungary's last issue on international markets to date, has a 6.0% annual coupon, and was priced at 270 basis points over mid-swaps.

The official also reiterated Budapest's line that it will not issue new debt on the international markets until a loan programme is agreed with the IMF. Talks with the international lender have been dragging on since Hungary applied for aid last November. The government has spent the time variously condemning the Washington-based lender and offering it concessions.

It did both last week. On the one hand, it unveiled a raft of orthodox fiscal consolidation measures and caving in over its plan to apply a new financial transactions tax to the central bank. On the other, it took out a series of adverts in national newspapers condemning the IMF's demands, and Prime Minister Viktor Orban predicted the country would be able to last through the end of 2013 without needing a programme.

However, the markets, which are keen to see a bailout in order to allow the IMF and EU to stay the erratic hand of Budapest policymakers, appear to have become used to Orban's theatrics for the domestic gallery. However, a debt issue ahead of a deal would add significant grist to the mill of those that suspect Orban is "doing a Turkey" and has no real intention of agreeing a deal.

However, analysts note that the bonds should still ease funding pressure on Budapest, which by definition weakens the case for the government to accept the IMF's conditions on a loan.

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