WRAPUP 1-Hungary markets slide on liquidity crunch

BUDAPEST, Oct 9 (Reuters) - Hungary’s currency and bonds fell sharply on Thursday as concerns grew over the country’s financing and banking system amid the global financial crisis and as the government said it would redraft the 2009 budget.

Liquidity dried up and trading froze in the government bond market, which sent the forint EURHUF=D2 into falls and late rumours, subsequently denied, that the government planned to nationalise its biggest commercial bank, OTP OTPB.BU aggravated losses.

Shares in OTP OTPB.BU, central Europe's biggest independent bank, plunged over 14 percent in late trade on market talk that the government was planning to nationalise it. Both OTP and the government firmly denied the rumour.

“This is absolutely nonsense,” OTP Chairman and CEO Sandor Csanyi told Reuters, adding that OTP had all the financing it needed until the end of 2009.

The forint fell nearly four percent to seven-month lows at 262.00 versus the euro.

Ten-year government bond yields jumped to around 9.95 percent from the 9.07 percent average yield set at an auction earlier on Thursday where Hungary cut its offer by 10 billion forints ($54.36 million) to 30 billion.

Hungary’s markets are fragile as the country’s high state debt levels and the reliance of its banking system on foreign financing keep it among the most vulnerable economies in the eastern part of the European Union, analysts said.

Citigroup analyst Eszter Gargyan said in a note that the Hungarian banking sector -- in which foreign banks have dominant stakes -- may face serious stress in meeting short-term obligations if access to external funds and foreign currency markets ceases.

Hungary also has one of the slowest growing economies in the region and Finance Minister Janos Veres said on Thursday an economic slowdown at its main export partners will force the government to cut its 3 percent growth forecast in the 2009 budget [IDn:L9696910] and redraft the budget.


Debt agency AKK allowed government bond traders to widen yield quote spreads to 50 basis points from 30 basis points, but analysts said the measure may not improve liquidity in the secondary bond market.

Asset swap yields, which earlier stayed well below the bond yield curve, also rose.

“I suppose that the central bank will not allow these markets not to work and will intervene, if needed,” said Zsolt Kondrat, analyst at MKB Bank. “We don’t know yet whether it will be needed, let’s see how markets open tomorrow.”

K&H Bank’s Gyorgy Barcza said: “Yields are unlikely to go further up as there is no trading... the central bank could help liquidity.”

Earlier this week the central bank said it was ready to act if absolutely warranted to uphold confidence in the banking system and ensure the safe operation of financial markets.

Additional reporting by Balazs Koranyi and Gergely Szakacs