Hungary bond comeback slashes IMF deal odds
LONDON, Jan 17 (IFR) - Hungary's potential return to the international bond market could cut the chances of an IMF agreement to practically zero, giving the government carte blanche to continue with its controversial policies, warn analysts.
Hungary announced this week that it had hired BNP Paribas, Citigroup, Deutsche Bank and Goldman Sachs to arrange meetings with fixed-income investors in the coming weeks.
Although no bond issue was mentioned, the presumption in the market is that the sovereign's first offering in nearly two years will follow. Any deal, most likely in dollars, would potentially remove the need for official-sector assistance.
Hungary's state secretary of the economy ministry, Gyula Pleschinger said at a conference on Tuesday that conditions would dictate the timing of a new Eurobond but added the government usually sells USD2bn per international bond issue.
Investors will want a premium on the sovereign's outstanding debt, said Yerlan Syzdykov, emerging markets fund manager at Pioneer Investments. "If the framework of risk appetite we are seeing today continues, I think they will have to offer investors at least 5% on a new 10-year benchmark," he said.
Hungary's 6.375% March 2021 note is trading at a bid yield of 4.64%, according to Tradeweb.
While a return to the markets would be a positive move, demonstrating that Hungary has access to private-sector funding, some analysts fear it will remove the last chance to apply discipline to the government, which in recent years has fallen foul of both the EU and the IMF because of its policies. These include a swathe of new taxes on banks, energy companies and retailers to reduce the budget deficit.
The appointment of a new central bank governor in March and two new deputy governors in July, which are likely to be political appointments, is also causing unease. "The central bank has been the last bastion of transparency since the government came in," said Peter Attard Montalto, emerging markets economist at Nomura.
The appointments could lead to the central bank providing funding for banks, corporates and the development banks via a form of QE as part of a government attempt to develop a state-owned banking sector, he said.
Attard Montalto added that while a new bond deal would likely go well, if for no other reason than the sheer amount of cash that investors need to put to work, it means the prospect of a new precautionary financing agreement between the IMF and Hungary looks further away than ever.
It's a view shared by investment house Raiffeisen Capital Management. "An agreement between Hungary and the IMF on financial support is looking less and less likely. Clearly, in light of the currently low interest rates in the capital markets, Hungary's government assumes that it will be able to finance itself without external help. This could, however, turn out to be a dangerous misperception," it said in a research note on Wednesday.
Hungary needs to refinance around EUR1.5bn in foreign-currency denominated bonds this year, according to Fitch, with most of that coming due in the first quarter. In total, the government has funding needs of EUR7bn, said Nomura.
Hungary last issued in the international capital markets in mid-2011. Since then it has funded itself domestically, including through retail bonds. (Reporting by Sudip Roy; Editing by Julian Baker)