By Piotr Skolimowski - Jul 23, 2010
Hungary’s forint slid for first time in four days and bonds fell as Moody’s Investors Service and Standard & Poor’s said they were reviewing country’s credit rating for a possible downgrade after talks with foreign lenders broke off.
The forint lost 0.8 percent to 286.81 per euro as of 2:37 p.m. in Budapest. It slid the most among 25 emerging-market currencies tracked by Bloomberg. The extra yield investors demand to own Hungary’s debt over U.S. Treasuries rose 13 basis points to 357 basis points, according to JPMorgan Chase & Co.’s EMBI Global Index. The benchmark BUX index dropped 1 percent to 22,048.28, led by the country’s biggest lender, OTP Bank Nyrt.
The International Monetary Fund and European Union on July 17 suspended their review of Hungary’s 20 billion-euro ($25.8 billion) emergency bailout without backing the government’s budget plans. The country has been relying on an emergency loan since 2008 and the rescue package has served as a backstop to reassure investors.
Standard & Poor’s will consider lowering Hungary’s debt rating to a junk, saying that without the IMF aid the country may “face higher and more volatile funding costs.” Moody’s also put the country on review for possible downgrade earlier today. S&P rates Hungary BBB-, its lowest investment grade. The Moody’s rating is two steps higher at Baa1.
The “Hungarian government needs pressure from external factors to realize that it needs IMF agreement to boost credibility,” said Koon Chow, an emerging-market strategist at Barclays Capital in London. “These external factors include ratings downgrades and currency depreciation. Otherwise they may do nothing.”
Adverse Effect
Hungary’s credit-default swaps widened 14.5 basis points to 343 basis points, according to data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
An agreement with the IMF and the EU would give “reassurance to the fiscal path,” Dietmar Hornung, vice president of Moody’s Investors Service, said today. Hungarian lawmakers yesterday approved a bank tax three times larger than levies proposed elsewhere in Europe, defying criticism from international institutions. The IMF said on July 17 that the tax would “adversely affect lending and growth.”
The forint has been the world’s worst-performing currency in the past three months with an 8.2 percent decline against the euro. Hungary’s debt management agency has missed its sales target at four forint-denominated auctions since June 3, when an official of the ruling Fidesz party said Hungary had a “slim chance to avoid a Greek situation.”
Suspended Bond Auctions
The country turned to international lenders in 2008 to avert default after demand for its debt dried up. At the time, the government suspended bond auctions, relying solely on its IMF credit line to repay debt and finance the budget. Regular debt sales resumed in April 2009, and Hungary has tapped international bond markets twice since.
“There is no way for Hungary to survive without the IMF agreement,” Lutz Karpowitz, emerging-markets currency strategist at Commerzbank AG, said by phone in Frankfurt. “The markets still believe that this is going to happen. Otherwise we would have seen the forint at 300 per euro already.”
Hungary’s government will discuss its efforts to cut the budget deficit with the European Union and not the International Monetary Fund, Prime Minister Viktor Orban said on July 21.
The Hungarian government seems “to misunderstand the dynamics between the International Monetary Fund and the European Union under the IMF program framework,” Societe Generale SA strategists Fabien Manach and Benoit Anne wrote in a note today e-mailed before the Moody’s announcement. The French bank has turned “short-term bearish” on the forint as the currency is expensive “relative to the mounting fundamental risks,” it said.
To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net
From Bloomberg published on Jul 23, 2010