BUDAPEST, July 24 High demand for the Hungarian central bank's new interest rate swaps (IRS) shows that commercial banks have been buying government debt heavily, a senior central banker told Reuters.
The National Bank of Hungary announced in April that it would convert its main 2-week liquidity bills into deposits from Aug. 1, trying to push banks into buying more government debt.
As part of this change, the bank also introduced the forint interest rate swap facility to allow banks to cut their risks on long-term forint bonds.
Hungary, which has the highest level of state debt in central Europe, at more than 80 percent of gross domestic product, is relying increasingly on issuing forint-denominated debt to reduce reliance on foreign funding. Foreigners hold some 4.88 trillion forints worth of forint denominated bonds.
Marton Nagy, managing director for the NBH in charge of financial stability, said high demand for the interest rate swaps was reassuring as by buying these swaps, banks would have to keep the government bonds for a year.
"The banking system is adjusting very strongly. They are buying government paper," Nagy said in an interview. "Demand for the IRS is very high... The most important condition is that you cannot close the IRS for a year."
"This means that you cannot sell government paper for a year. We give the IRS a good price because we lock government paper into banks' balance sheets so that everyone can sleep well at night." (Reporting by Krisztina Than and Gergely Szakacs; editing by Tom Pfeiffer)