Hungary raised less than half as much as planned at a debt auction and the Hungarian forint’s foreign exchange rate dropped to a month low against major currencies on concern the government may not obtain international aid after two credit downgrades to junk status.
The Hungarian government sold 15 billion forint ($62 million) in bonds, 18 billion forint less than the target, at the auction today as borrowing costs rose to the highest in more than two years, while the state rejected all bids for three-year notes. The forint depreciated as much as 1.2 percent and traded 0.6 percent weaker at 310.7 per euro, the weakest on a closing basis since Nov. 25, at 5 p.m. in Budapest.
Standard & Poor’s cut Hungary to non-investment grade last week, following a similar downgrade by Moody’s Investors Service a month earlier, after the IMF and the EU suspended bailout talks with Hungary, citing proposed bills curbing the central bank’s independence. Lawmakers are scheduled to vote on the bills tomorrow.
“Hungary can’t finance itself from the market for long unless things begin to normalize,” Antero Atilla, a Copenhagen- based economist at Danske Bank A/S (DANSKE), wrote in an emailed response to questions. “With two downgrades already as kicks below the belt, it will be all the more difficult to climb back on the horse.”
The Debt Management Agency, known as AKK, sold 10 billion forint in 2017 securities at 9.63 percent from 8.72 percent on Dec. 15, and the highest cost since June 2009. The agency raised 5 billion forint in 2022 notes at 9.70 percent from 8.78 percent on Dec. 1 when that maturity was last sold. Investors bid for a total 45 billion forint in debt at today’s auction.
The IMF has yet to decide on returning to Hungary for formal aid talks as the decision depends on the government engaging on key “policy issues,” Reuters reported yesterday, citing an IMF official.
“The chance of an IMF-EU credit deal is receding,” Jozsef Miro and Gergely Gabler, Budapest-based analysts at Erste Group Bank AG, wrote in research reports today. “As long as there is no IMF credit line, the country will need to finance itself from the market and yields may be heading toward double digits after today’s unsuccessful auction.”
The secondary-market yield on the three year bonds rose 30 basis points, or 0.30 percentage point, to 9.20 percent while the 10-year yield jumped 27 basis points to 9.9 percent.
The Hungarian forint’s foreign exchange rate has lost 14 percent versus the euro since June, the biggest drop among more than 170 currencies for the second half of 2011.
Hungary’s currency has declined 10 percent this year, its worst performance since 2003, the year before the country joined the European Union. A weaker Hungarian forint boosts repayments on foreign currency debt for the government and households and risks driving banks’ losses.