BUDAPEST, April 22 (Reuters) - Hungary's foreign currency reserves could be reduced cautiously if, as forecast, the country's short-term external debt decreases further, two senior central bankers said in a study published on Tuesday.
With central Europe's highest debt burden and heavy reliance on foreign financing, Hungary needs to exercise great care not to sour investor sentiment with too deep or too sudden a cut in reserves which could trigger a tumble in its forint currency and a knock-on sell-off in Hungarian bonds.
Hungary's foreign currency reserves jumped to 36.2 billion euros ($50 billion) by the end of March from 30.8 billion at the end of September due to strong inflows of European Union development funds and dollar bond issuance by the government.
Marton Nagy and Daniel Palotai said in the study published on business website portfolio.hu that the country's foreign currency reserves were expected to increase even more this year as Hungary receives additional EU funds.
They said the level of reserves exceeds the usual benchmarks watched by investors when they assess a country's vulnerability.
"Going forward, we can say that a continued reduction in the short-term external debt could be favourable with respect to the reserves needed ... and could allow a limited, gradual and cautious reduction in the reserves," they said.
The central bankers, who are not members of the rate-setting Monetary Council but are among top policy makers at the bank, did not specify the level to which the reserves could be cut, but that the level should leave enough of a buffer in case global investor sentiment deteriorates.
The bankers said Hungary's short-term external debt stood at 28 billion euros at the end of 2013 and its foreign currency reserves at 33.8 billion euros significantly exceeded this.
"But we need to be very cautious here: the reserves can be reduced only by a prudent assessment of risks, always ensuring that the reserves remain at a level expected by investors," they said. (Reporting by Krisztina Than; Editing by Louise Ireland)