Hungary tries to go it alone with international bond plan

By bne IntelliNews November 29, 2012

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Lusting after the record low yields achieved by the rest of Central and Eastern Europe during the recent global bond rally, and running out of time to find hard currency to fund debt redemptions next year, Hungary appears to have scrapped any pretence of seeking a bailout loan from the International Monetary Fund (IMF) by announcing plans to tap international debt markets next year.

"The government intends to issue (a) foreign currency bond on international markets, as the financing needs posed by expiring state debt also requires foreign currency debt issuance to avoid overstraining the forint (debt) market," the Economy Ministry said in an emailed response to Reuters questions.

Despite falling borrowing cost across the region and strong local currency activity driven by the liquidity actions of the US Federal Reserve and European Central Bank (ECB), Hungary has not issued any foreign currency debt in 2012. Instead, Prime Minister Viktor Orban's government has insisted that it plans to agree a bailout deal with the IMF first. The application for a loan over a year ago has done much to ease market pressure on the forint and yields despite the faltering economy.

Relations with the IMF have nosedived in the last few weeks however, with the IMF saying it would not return for more talks this year due to policy moves that fly in the face of its demands. Budapest has only accelerated such action since, slapping new taxes on the banks and utilities, suggesting little urgency to get the international lender to sit back down with it in the near future.

However, despite a strong trade surplus that has allowed Hungary to survive without borrowing on the international markets for more than a year, analysts suggest the country needs to find some form of hard currency funding by April due to debt redemption obligations. Hungary needs to rollover about $7.2bn worth of bonds and $5.9bn of repayments to the IMF in 2013, close to half falling due in the first quarter, according to Reuters' calculations based on data from debt agency AKK.

Economy Ministry State Secretary Gyula Pleschinger said that while the government doesn't plan any foreign bond issuance this year, the ministry's statement "obviously reflects that we will clearly not finance all expiring foreign currency debt from forint issuance," he said, adding that AKK's financing plan in December would reveal further clues about any potential issuance in 2013.

"The timing can also depend on whether there will be an IMF agreement, and if there is, exactly when," Pleschinger said. "It is also clear, and we have made no secret of this, that with nearly half of our debt being in foreign currency, we were obviously never going to refinance all of this from forints."

He added that a choice of currency will depend on which market offered the best available conditions but this, too, was up to the AKK to decide when it implements next year's plan.

The bond plan is understandable. The government's relations with the IMF have deteriorated to a point where it's highly unlikely it can manage to secure an agreement in the time it needs. At the same time, Budapest is watching its neighbours make hay while the sun shines on the CEE bond market. However, there's already talk of a bubble. The likes of Poland and Slovakia have accelerated issues in the fourth quarter of the year to front load 2013 debt ahead of the potential burst. Hungary's plan has always appeared to be to use the IMF as a shield against the market until it regained access to reasonable borrowing costs.

However, it also sees Hungary push out on its own into stormy seas. With its high debt load and sluggish economy, the country's currency and yields are highly exposed to any return of risk aversion. The ratings agencies warned it a few weeks ago not to try to go it alone without the IMF; Standard & Poor's downgraded the sovereign another notch into junk last week and Fitch Ratings is expected to do the same before the end of the year.

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