After weeks of nods and winks, Hungary on Thursday announced plans to raise €4bn-€4.5bn in foreign currency bonds next year, in a move which suggests that Budapest is dropping plans for a financing programme with the International Monetary Fund any time soon.
Given prime minister Viktor Orban’s reluctance to deal with Fund in the first place, and the recent sharp drop in borrowing costs, the news comes as little surprise. But it will leave Budapest hostage to market sentiment. That could prove very risky.
The AKK government debt agency said on Thursday that Hungary, which last tapped the international markets in 2011, planned to go to investors again in the first quarter of 2013.
“We always decide depending on market conditions, but we aim to raise the necessary funds as soon as possible,” AKK deputy chief executive Laszlo Andras Borbely told a news conference, according to Reuters.
The debt agency expected a deal sooner or later with the International Monetary Fund on a financing backstop, but this would have “no direct role in debt financing in 2013″, he said.
Prime Minister Viktor Orbán’s government abandoned proposals to sell foreign-currency debt this year in the face of rising borrowing costs, and reluctantly started talks with the IMF.
But while the negotiations failed to make much progress, the yield on Hungary’s 2021 US$ bonds fell from 9.37 per cent in January to just 4.8 per cent this week. Budapest benefited from the global surge in emerging market bonds and the hunt for higher-yielding investments.
Timothy Ash of Standard Bank said in an emailed note:
I guess the Hungarians have finally put us all out of our misery by announcing the decision to tap the Eurobond market and in size. I guess it also finally means no IMF deal any time soon. Pricing was just too tempting for the Hungarians not to resist coming to market. The strategy will probably be to do as much financing as early as possible, to get cash in the bank to fund the sovereign in the run up to the parliamentary elections due in April 2014.
The forint barely moved on Thursday’s announcement, rising o.5 per cent against the euro to trade at HUF285.2. But that doesn’t mean the government’s planned issues will have a clear run.
One key question is the succession to András Simor, who steps down as central bank governor in March at the end of his five-year term. Simor has irritated the Orbán government by resisting pressure to cut interest rates and boost the economy. Ministers will have a chance to appoint a governor closer to their hearts – but they will have to take care not to frighten the markets.
Hungary has won investors’ confidence this year by running a tight budget, with revenues boosted by controversial taxes, for example on banks. Public debt is set to fall from 77 per cent of GDP at the end of 2012 to 73 per cent by the end of next year.
But it would not take a lot to upset investors, given Orbán’s unpredictable policy record.
Hungary: prepping a eurobond? beyondbrics
Hungary: cut now, worry later beyondbrics
Hungary: bank chief quits in tax dispute with Orban government, beyondbrics
Justifying Hungary’s rate cut, beyondbrics