Hungary drifts further from IMF deal with FX bond plan

BUDAPEST Wed Nov 28, 2012 6:19pm GMT

BUDAPEST (Reuters) - Hungary flagged plans on Wednesday to tap international bond markets for foreign currency funding, its clearest signal yet that it does not expect a deal with the IMF and the EU after more than a year of on-off talks.

Central Europe's most indebted nation has not tapped international bond markets this year and Prime Minister Viktor Orban's government has until now said any foreign issuance could come only after a deal with international lenders.

After a recent string of policy signals that Hungary is not seriously pursuing an agreement with prospective lenders, one analyst said a successful foreign currency bond sale next year would mean "the IMF deal is dead".

Regional peers Poland, the Czech Republic, and Slovakia have all sold foreign-currency bonds in recent months, taking advantage of lower yields to raise funds and hedge against any worsening of the euro zone's debt crisis.

Hungary, whose debt is high relative to its neighbours, last tapped international bond markets in 2011.

The country is rated "junk" by all three main credit rating agencies, and was downgraded further last week by Standard & Poor's, which cited its weak growth outlook and government policies that conflict with IMF/EU recommendations.

"The government intends to issue (a) foreign currency bond on international markets, as the financing needs posed by expiring state debt also requires foreign currency debt issuance to avoid overstraining the forint (debt) market," the ministry said in an emailed response to Reuters questions.

The ministry was asked whether, given there is no date for the next round of discussions with the International Monetary Fund and the European Union on a financial safety net, it planned to tap foreign debt markets in coming months.

"Frankly, I don't think anyone would blame the Hungarians now for taking advantage of still very, very cheap financing and come to market with a big ticket Eurobond deal," said analyst Timothy Ash at Standard Bank.

"Cheap financing is here and now, and there is no chance of an IMF deal now before Q1 2013 at the earliest, so it must be tempting for Orban and Co. just to close their eyes and issue."

MARKET CONDITIONS

Hungary needs to refinance about $7.2 billion worth of bonds and $5.9 billion of International Monetary Fund repayments next year, with almost half falling due in the first quarter, Reuters calculations based on data from debt agency AKK showed.

Economy Ministry State Secretary Gyula Pleschinger told Reuters Hungary would tap international debt markets in 2013 depending on market conditions as the government will "clearly not finance" all foreign debt expiries from domestic issuance.

"This year we do not plan foreign currency bond issuance, this statement (by the ministry) obviously reflected that we will clearly not finance all expiring foreign currency debt from forint issuance," Pleschinger told Reuters in a phone interview.

He said debt agency AKK's financing plan next month would reveal further clues about any potential issuance in 2013.

"The timing can also depend on whether there will be an IMF agreement and if there is, exactly when," Pleschinger said. "It is also clear, and we have made no secret of this, that with nearly half of our debt being in foreign currency, we were obviously never going to refinance all of this from forints."

He added that a choice of currency would depend on which market offered the best available conditions but this, too, was up to the AKK to decide when it implements next year's plan.

When asked whether S&P's recent ratings cut and the risk of rival agencies following suit could complicate foreign currency issuance in 2013, Pleschinger said investors had taken the latest downgrade in their stride.

"On the basis of investors' reaction, it was clear that the S&P decision caused a temporary market fall of several forints, but all of that has now healed, so investors' assessment differs from that of S&P," he said.

Nomura analyst Peter Attard Montalto said a debt issue would probably sell because the government would "cheapen it up to successfully get it away", but the removal of the IMF as a potential backstop could hurt local debt markets.

"The government has now seemingly given up the pretence of IMF talks and is ready to issue in the new year in FX market as we had long suspected," Montalto said.

"The current yields are simply too attractive to wait for some mythical IMF deal. Such issuance however will mean the IMF deal is dead and there will be no potential for external constraints on unorthodox policy."

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Ruth Pitchford/Catherine Evans)

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