Hungary’s plan to get some cash in the bank

March 23, 2012

Hungary says it might borrow money from global bond markets before it lands a long-awaited aid deal with the International Monetary Fund. That pretty much seems to suggest Budapest has given up hope of getting the IMF cash any time soon. Given the fund has already said it won’t visit Hungary in April, that view would seem correct.

There is some logic to the plan.

Hungary desperately needs the cash — it must  find over 4 billion euros just to repay external debt this year.

It is also an attractive time to sell debt.  Appetite for emerging market debt remains strong. Emerging bond yield premiums over U.S. Treasuries have contracted sharply this year and stand near seven-month lows. Moreover, U.S. Treasury yields may rise, potentially making debt issuance more costly in coming months.

For Hungary’s government , the idea of a successful bond sale is particularly attractive as this will at a stroke  improve its bargaining position with the IMF. That’s bad news, says Tim Ash, RBS head of emerging European research:

The problem is that getting cash in the bank may actually reduce the likelihood of the government actually finally cutting a deal with the IMF, so arguably increases market risk over the slightly longer term.

He concedes however:

If (Hungary) is willing to pay something of a premium to investors to get cash in the bank…. the way markets are at present, they would be able to put a deal away.

That’s the flipside.  Neighbours Poland, Czech Republic and Romania have successfully and cheaply sold bonds this year. But none of these countries are in dire financial straits. Hungary is. In order to persuade investors to lend, it must bank on paying a significally higher yield.

Hungary’s current 2020 dollar bond is yielding 7.58 percent (well off nearly 10 percent hit at the start of the year but also far above end-2010 levels around 5 percent), and depending on the market Budapest will have to pay at least 50-100 basis points above that, reckons Michael Ganske, head of emerging markets research at Commerzbank.

That may seem like a good bargain, given rising U.S. yields could make it costlier for emerging issuers to borrow in coming months. Ganske says:

From Hungary’s perspective, they may get the IMF deal in the third quarter but what if U.S. Treasury yields are much higher by then? From investors’ perspective, you get compensation for buying a bond that has a negative spin on it but the likelihood is Hungary will find an agreement with the IMF and if that happens the bond will rally.

Bond markets are pricing the possibility of a new issue, with yields across the Hungarian curve moving higher. The 2020 bond has fallen 1.5 points today.

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