A (costly) balancing act in Hungary

February 14, 2013

A bond trader in London is still marvelling at the market’s willingness to snap up a Eurobond from Hungary, calling it a country with “a policy mix so unorthodox even Aunty Christine won’t lend to them”.  But Hungary’s probable glee at bypassing the IMF and “Aunty Christine”  with $3.25 billion in two bonds that were almost four times oversubscribed, is probably short-sighted.

Hungary needs to raise the equivalent of $23.4 billion this year to repay maturing debt. The bond placement will enable Hungary to easily meet the hard currency component of this, and it has been enormously successful in luring buyers to domestic debt markets.  Such has been the demand for Hungarian bonds in recent months that foreigners’ holdings of forint-denominated government debt are at a record high of over 45 percent.

The success does not necessarily represent a thumbs-up for Prime Minister Viktor Orban’s policies but is more likely due to the yield Hungary paid — well over 5 percent for five and 10-year cash. In dollar terms that is not to be sneezed at, especially at a time when liquidity is abundant and the yield on mainstream dollar assets is low. The same reason is behind the demand for forint bonds, where Hungary pays over 5 percent on one-year paper. An IMF loan would have been far cheaper. (The rate for a standby loan of the kind Hungary had is tied to the IMF’s Special Drawing Rights (SDR) interest rate. Very large loans carry a surcharge of 200 basis points)

The dollar bond sale is forcing Budapest to pay lenders roughly double what it would have paid for an IMF standby loan, says William Jackson at Capital Economics:

Of the Hungarian government’s 5.1 billion euro of maturing hard currency debt this year, 3.6 billion euro consists of IMF loan repayments, which carry a much lower interest rate than the Eurobonds. By rolling over these repayments with Eurobonds, debt servicing costs will rise. Note too that the new dollar bonds add to Hungary’s underlying FX debt problem.  Around half of government debt is hard currency-denominated (c. 36% of GDP). And Hungary’s economy has contracted in  dollar (and euro) terms over the past five years – increasing the burden of dollar (and euro) debt in local currency terms.

According to Benoit Anne, chief EM strategist at Societe Generale:

The absence of (an IMF) safety net may haunt them in future…The IMF was a cheap insurance policy but the government has decided to ride the global liquidity-fuelled emerging markets appetite wave.

Cost was never likely an issue for Orban, who might view an IMF deal (entailing toeing stringent IMF terms) far costlier in political terms ahead of a 2014 election. The other, more widely voiced, concern is that with a successful Eurobond sale under its belt and an election looming, the government may feel more confident in pursuing its unorthodox growth agenda, Jackson says.

Meanwhile, the IMF’s representative in Hungary Iryna Ivaschenko warned the golden days may not last for Budapest:

Countries like Hungary which.. still have sizeable financing needs year after year are susceptible to sudden changes in investor sentiment which is inevitable.

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