Hungary bids to boost forthcoming bond with early IMF repayment

By bne IntelliNews January 28, 2013

bne -

In a bid to boost confidence ahead of its planned return to the international debt markets, Hungary has repaid €607m of its outstanding loan to the International Monetary Fund early, the economy ministry announced on January 25.

The tranche was paid more than two weeks ahead of the scheduled date of February 12 to prevent possible volatility in Hungary's financial markets, the ministry said in a statement. Budapest used the proceeds from the recent sale of €1bn in domestic retail bonds to make the repayment, it added.

Antal Rogan, parliamentary leader of the ruling Fidesz party, hailed the move. "Only a country with stable public finances is capable repaying an IMF loan worth HUF180bn ahead of schedule," she said, according to Bloomberg.

After around a year of dancing the hokey cokey with the IMF over a new loan, only for those talks to break down over Budapest's "unorthodox" economic policy, Hungary is gearing up to issue its first international bond since May 2011. However, with that action putting the final nail in the coffin of a new deal with the international lender, it has lost an important anchor.

On top of that, the market is now nervously eyeing the announcement of who will take over as the next governor of the Magyar Nemzeti Bank. Controversial Economy Minister Gyorgy Matolcsy is thought to be a shoe-in to run an expansive monetary policy at the behest of the government, ignoring currency and inflation risk in a bid to drag the economy out of recession.

That worry has been putting pressure on the forint over the last month or so. Following the announcement, the forint sagged to its weakest against the euro since June 12. The currency has depreciated 2.7% since December 21, the day before Matolcsy said the next governor should "bravely use unorthodox tools" to help the economy recover, points out Bloomberg.

Analysts at Equilor suggest that while the effect on the currency appears counter-intuitive at first glance, it suggests the market believes Budapest intends to pay down this year the entire sum still outstanding to the Washington-based lender under its previous 2008 loan programme. "As the [economy] minister described the deal as a great success, we think that the whole €5.5bn loan is planned to be prepayed to the IMF this year. If this was put into practice via decreasing FX reserves of the central bank, state debt to GDP could decrease by 5 percentage points (to around 73%). This could be useful for the current government for the 2014 elections, while it could have negative impact on the forint as decreased FX reserves would increase the risk assessment of Hungary."

According to the schedule, Hungary is set to pay off another €3bn to the IMF this year, which is one of the major elements pushing the country back to the markets. The decision to finally ditch the prospect of a new IMF loan by returning to the international markets was clearly pushed by the record low yields that Hungary's Visegrad peers have been scoring.

That has seen Poland and Slovakia in particular rapidly issuing debt in the last few months in a bid to gather as much of their annual borrowing targets as possible before the party runs out of juice. Hungary will be wary that recent reports suggest that the cheap liquidity handed to Eurozone banks by the European Central Bank has now started winding in. Citi analysts say they expect to see excess liquidity at European banks drop by up to €250bn by the end of the first quarter as they begin to reduce their exposure to the ECB's long term refinancing operations.

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